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Fair Isaac Corporation (FIC)

F3Q06 Earnings Call

July 26, 2006 5:00 pm ET

Executives

John Emerick - VP and Treasurer

Tom Grudnowski - CEO

Chuck Osborne - CFO

Analysts

Thomas Ernst - Deutsche Bank Securities

Brad Eichler - Stephens Incorporated

Michael Nemeroff - Wedbush Morgan Securities

Phil Mickelson - JP Morgan

Tony Wible - Citigroup

Presentation

Operator

Good afternoon and welcome to Fair Isaac Corporation's Third Quarter Fiscal 2006 Results Conference Call. (Operator Instructions). I would now like to turn the call over to Mr. John Emerick, Fair Isaac's Vice President and Treasurer. Thank you. Mr. Emerick, please go ahead with your call.

John Emerick

Thank you, Toshiba, and good afternoon everyone. This is Fair Isaac's third quarter fiscal 2006 Earnings Call. We issued our earnings release after the market closed this afternoon and you may access it on our Investor Relations page on our website. A replay of this call will also be available on our website approximately two hours after the completion of this call through August 23.

I'd like to remind everyone that except for historical information, the statements made on this call should be considered forward-looking within the meaning of the federal securities laws, including the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995. These statements include statements concerning our business strategies and our intended results and similar statements concerning anticipated future events and expectations. The forward-looking statements made on this call and in the news release distributed today should be viewed with caution. These statements are subject to risks and uncertainties, which could cause actual results to differ materially from those expressed and/or implied by these statements. Additional information concerning risk and uncertainties that could cause future financial results are described from time to time in our SEC filings, including our Annual Report on Form10-K for the fiscal year ended September 30, 2005, and quarterly report on Form 10-Q for the period ended March 31, 2006. Fair Isaac disclaims any intent or obligations to update these forward-looking statements. A reconciliation of pro forma information that we provide to the most comparable GAAP information is posted on the Presentations page of our Investor Relations page on our website.

On the call today are Tom Grudnowski, our Chief Executive Officer and Chuck Osborne, our Chief Financial Officer. They'll review third quarter results and other business related information. Once we've completed our prepared remarks, we'll open the call for questions. Now, I'd like to turn the call over to Tom.

Tom Grudnowski

Thank you very much and welcome to all of you to our earnings call. As usual, I'll spend a few minutes providing some color on the quarter and Chuck will then dive into the numbers.

As you can tell from our release, we reported fully diluted GAAP earnings of EPS of $0.40 and once you add back $0.10 for FASB 123 for options and $0.05 for our previously announced restructuring plan, we would have reported a non-GAAP EPS of $0.55, which is a penny higher than the $0.54 we guided you to on last quarter.

For this quarter revenue was 207 million with net income of 26 million after the restructuring charges on a non-cash option expense. And remember, this is now the third quarter which includes the new stock option expense accounting rule, which accounts for roughly 10 million of the operating expenses presented in our financials.

Our core products such as Scoring, TRIAD, Falcon and EDM performed well again this quarter. In addition, we saw positive results in several of our product areas based upon what we believe to be early indications that our client-focused reorganization is the correct strategy to pursue.

As you may recall, we previously announced on June 15 a major restructuring to better align our people with our customers and to focus our P&L leaders on client service flexibility, quality, and growth. And what this really means is we are now managing our business more with a customer-centric focus than a product-centric focus. Given the number of products we now sell and our customer demands for services to create more customized solutions, if you will, our former product-centric organization was not as responsive to changing market conditions and customer insights.

We spent the entire quarter reorganizing and positioning our new ICN leaders, as we call them, and building teams around our many customer segments. We now have 22 customer segments, each a mini Fair Isaac business unit, if you will, dedicated to their unique market realities. Not only will this help us serve our customers better, but we believe our product innovation stream, which has long driven our true launch and value, will generate improved ROIs on our approximately $90 million of annual product investments. We believe that most R&D, in other words, in the past has been based on what we've thought customers wanted. Now we're trying to align those investments more on what we know our customers want. If you follow our leverage model, you'll appreciate that a slight improvement in innovation productivity can have a very large impact on our results.

The overall Fair Isaac organization reacted well to this management change by having a good revenue quarter despite all the commotion that could have provided an opportunity for us to take our eyes off the ball. In fact, although we missed our 210 million goal by just one big deal that got pushed to Q4, our culture, I'm happy to report is evolving into one that embraces change rather than gripes about it and that is why we were able to turn the ship so quickly this quarter.

For Q4, we estimate revenue will be again around 207 million and our non-GAAP EPS will be approximately $0.57. We're remaining conservative here because again our restructuring effort this quarter is going to focus on recruiting and promoting key client rainmakers in our integrated customer networks. So we're going to continue to focus on our long-term investments in client rainmakers.

If you add all those numbers together that would get us to an annual revenue of 825 million for fiscal year '06 and a non-GAAP EPS of $2.16. And I get back to that number and remind you, at the beginning of the fiscal year, we guided at $2.15. So we are right on track with EPS, although as it turns out we will earn it on less revenue.

From a bookings perspective this quarter, we did approximately $94 million of bookings and you can check the waterfall report for details. Although this gross booking number was less than we planned, interestingly the revenue yield of this, the yield if you will, of first quarter revenue against that number was our best ever which was about 23%. If you look at the last few quarters, you'll note in the waterfall report that we've got approximately the same first quarter revenue for $94 million of gross bookings this quarter that we got from $127 million of bookings in Q1. And you'll note that that has been increasing throughout the fiscal year. By the way, the primary reason for that, and Chuck can get into more detail when we give you the numbers, has to do with over the two periods that we were measuring there. The range of years per deal went from about 3.5 years per deal to 2.2 years per deal.

So, is the 94 million good or bad? Well, I think gross bookings are turning out to be less of a good quarter-over-quarter future revenue predictor than it might first appear because there are very, very many variables at the gross level that are hard to judge. However, I am confident that the bookings number for the quarter is truly reflective of more of timing and not an indication of our business prospects or opportunities. In fact I know the backlog of future opportunities is still growing and is the largest ever, so I don't really concern myself with this particular quarterly bookings number. However, we're going to keep using it and see if the data gets richer as we accumulate more of it. The most interesting thing in the bookings number this quarter was about 53% of this quarter's bookings related to international clients. And you know this has been a strategic focus over the last year, it appears we're finally getting some good traction there.

Now, let me briefly go through a few of the major areas of business. I'll start with Scoring. Our Scoring Solutions unit had another very strong revenue quarter at 44.3 million and we continue to see strong product pull from many of our major innovations that are now a little over a year old, including the FICO Expansion score, the Global FICO score, Qualify Score in general just increased volume commitments from our customers. We expect the last quarter of '06 will remain as strong for us as it has in each of the prior quarters.

One of the questions that you've been asking me in the last few quarters about the new Scoring products and to give you some perspective on the traction that they're gaining or not gaining. So let me give you some perspective for the first time on some of these new products. The new Scoring products that were introduced a little over year ago, although they will do a little less than $5 million this fiscal year, will drive around $15-20 million of Scoring revenue in fiscal '07. This is primarily because most of the work we're doing this year is installing these Scoring solutions at our customers and next year the recurring revenue related to the contract starts to arrive.

The Global FICO scoring interesting is now in 11 countries, soon to be 15. We have about 25 clients in those countries and we have several smaller international credit bureaus who now also sell Global FICO scores. And our FICO Expansion score has now been validated by some of our largest customers, its take up is underway. So, interestingly we believe these new products are now becoming a significant part of this particular segment and we'll continue to provide you some perspective on it in the future. And I'll give you some more color on it as we provide '07 guidance next quarter.

On the consumer myFICO.com side, we had bookings of just short of $16 million this quarter, which was very good. The number of subscribers continues to increase. We continue to look for new product improvements, introductions, I should say, to improve the shopping cart size to take advantage of our high repeat purchaser rate, as well as, our high level of purchases for first-time visitors. The recurring revenue now from this site is approaching 30% and we have several new products that will be coming out soon, some this quarter that will help increase our product profile on myFICO.

On the Fraud front, we had another great quarter, reflecting strong growth against the same period last year. We remain the leader in this growing field, with substantial bookings this quarter and continue to operate, opportunities I should say with both new and existing customers. As I mentioned last quarter, we won a major engagement with SiNSYS, one of Europe's leading new payment processing and card service companies. We were able to displace a key competitor and sign an agreement in addition to that for both TRIAD and Falcon. We're also getting some traction on Falcon ID and Falcon Online Access. We believe again the good traction we're getting here will provide momentum as we go into '07.

On the TRIAD Account Management side, as I mentioned, we won a major engagement with SiNSYS in that regard and we've got a couple of their clients already committed to both the new Falcon and Customer Management Solutions. We have a lot of backlog built up in the fourth quarter for TRIAD, so we're anticipating a significant rise in revenue as we finish the year with several major engagements, not only on the end user TRIAD front, but with new process or partners.

One of the major activities this quarter was in collections and recovery. This quarter was dominated by a major contract win at Lloyds where they selected Debt Manager as their enterprise-wide collection recovery system as a replacement to an existing in-house system. In addition, they became another major UK lender to subscribe to our Placement Plus product, which helps with late collection accounts. We also introduced a Placement Plus optimization product this quarter, which they also signed up for. So we're getting very good traction on Debt Manager and related products that work well with that suite of collection functionality. We're also seeing some increase in the collections area in the Asian market and again anticipate some good momentum in this particular area.

Finally, I think I'll make a couple of comments about EDM like I normally do. The quarterly results for EDM were above our expectations and these improvements were shared across product geographies in some of our major industries. We had strong modeling sales at some of our major banks, both internationally -- primarily internationally and EMEA is showing strong signs of demand, particularly in financial services and in other new countries like Greece.

Our insurance vertical continues to grow with maturity of license deals, iMedium Technology, at Western United, Great American and Chubb. We also had a major win in the healthcare space at Humana. We also had a couple of major wins with the Quebec government, with a partner of Fujitsu and in the New Jersey Department of Labor with our Accenture partner. We had strong bookings, professional services bookings that will provide us good momentum as we enter the fourth quarter. It's important to signup those professional services deals, so that we could actually work the hours. And so, we're off to a good start this fourth quarter in the EDM Professional Services space.

We started the fourth quarter with one of our strongest pipelines that we've seen in more than a year in this particular EDM space. Our product, our major project in EDM of course is Blaze Advisor, which was again recognized as the top offering in its class with a rating of excellent by InfoWorld who noted the product was "phenomenal processing speeds." So some of the investments we have made in trying to differentiate ourself in the product that we're already number one are showing some progress.

We also think that EDM is a difficult thing to sell and as you know, we've been growing our sales force and client partners in this particular area. And with the maturing EDM technology sales force, we also expect EMEA and North America to grow.

So, those are my comments on some of the major areas of growth for us. Let me give you a few more comments on guidance and close it and turn it over to Chuck. Again, our guidance for the remainder of '06 is 207 million for revenue and GAAP EPS of $0.33 per diluted share, including share-based compensation expense and a new fourth quarter charge that Chuck's going to talk about here in a second, on vacating some excess real estate. For the full year, we expect revenue as I said of 825 and GAAP EPS after all the things Chuck's going to talk about of $1.56 per diluted share.

In closing, despite all of our restructuring efforts and distractions, again we beat our pro forma guidance by a penny. I'm proud of the management team for accomplishing that with all the change and we anticipate that we have some momentum going into fiscal '07 now and hopefully with the changes that we're making, this will enable higher organic revenue growth and even faster EPS growth. And I'll comment on that after the fourth quarter call like I normally do. Just to remind you, the reason we're confident about where we are is we've made a lot of strategic moves this year to increase our organic growth, including the new client-centric organization, our focus on the fast-growing EDM marketplace, our focus on placing international leadership resources around the world, our focus on better integrating and cross selling our strong suite of application products. As you know, we stayed away from major acquisitions for a year in order to stay focused on building a stronger management infrastructure and culture.

So hopefully some of those areas will provide some momentum entering the fourth quarter and I can speak to the momentum they'll generate in '07 in a few months. We also plan to continue to use our strong free cash flow to pursue share repurchase targets. We bought back about 3 million shares this quarter. And with that, I'll turn over the financial details to Chuck. Thank you very much.

Chuck Osborne

Thanks Tom and good afternoon everyone. As usual, I'm going to provide a summary of our third quarter fiscal '06 results and then talk about our fourth quarter guidance. Beginning with revenue, we reported revenue for the third quarter of 207 million, essentially flat compared to the second quarter and a 2% increase over the same quarter in the prior year. Our revenue was just under 3 million short of our third quarter guidance of 210 million.

As we discussed in our news release, our revenue contribution by market segment is as follows. Scoring contributed 44 million or approximately 21% of the total revenue for the quarter, as compared to 41 million or about 20% of revenue in the same quarter of the prior year. Scoring continues to benefit from the increase in risk scoring services at the credit bureaus, our PreScore service and an increasing demand for our Expansion scores.

Strategy Machines contributed 115 million or about 55% of total revenue against 115 or about 56% of revenue in the same quarter of the prior year. This relatively flat performance is somewhat misleading as growth in the fraud, consumer originations, and collections and recovery market units were offset by declines in the marketing services, insurance bill review and customer management areas. As previously noted, the comparison of '06 revenue versus '05 revenue for the marketing services and insurance bill review market unit has been impacted by the loss of several contracts.

Analytic software tools totaled 12 million or about 6% of the total revenue for the quarter against 15 million or about 7% of revenues in the same quarter the prior year. The decrease was mainly attributable to the decline of this quarter's revenue for the Blaze Advisor product.

Finally, the Professional Services segment of our business contributed 37 million or about 18% of total revenue against 33 million or about 16% of total revenue in the same quarter last year. The increase this quarter was due to the successes in fraud, originations, analytics and industry consulting market units. The percentage of this quarter's revenue by vertical market was as follows. Financial industry was 64%, insurance industry was 8%, telecom was 5%, retail industry was 5%, and all other verticals made up 18%, and some of these other verticals, of course, pharma, government, travel, media and entertainment, auto, high-tech and business services make up that 18%.

The company's transactional or recurring revenue for the quarter represented approximately 74% of our total revenues, in line with the same quarter the prior year. Percentage of consulting and implementation revenues increased to 17% of our total revenues this quarter, as compared to 16% in the same period last year. One-time or license revenue was 9% of our total revenue this quarter, compared to 9% in the same period last year.

We started to see more traction in the international marketplace this quarter. Our international based revenue increased to 30% of our total revenue compared to 26% of total revenue last year. We're finding a growing number of opportunities in the Asia-Pacific region as well as in Europe.

We will again be presenting GAAP expense numbers that is with option expenses included. For your analysis, we have provided a breakdown of the share-based compensation expense by operating expense category as a note to our financial statements. The breakdown of our operating expenses, represented as a percentage of revenue during the quarter, were as follows. Cost of revenue was approximately 35% compared to 34% in the same quarter last year. Our research and development costs were 10% compared to 10% in the same quarter last year. Finally, selling, general and administrative costs were 32% against 29% in the same quarter last year.

On June 15, we communicated through a press release and conference call our decision to eliminate roughly 200 positions as a result of our adoption of a client-centric model. We estimated that we would incur one-time pre-tax severance costs of 5.7 million in the quarter and a forecast of 24 million in annualized savings as a result of the restructuring. The final reduction in headcount was approximately 190 positions. In addition, while most of the eliminations were immediate, a number of positions required a transitional period that pushed termination dates into the current quarter. The end result is that the actual amounts of both the severance charge and the annualized savings have been reduced. The severance charge was reduced from a pre-tax amount equal to 5.7 million to the 5.3 million reported in our financial statements and the annualized savings have been lowered from 24 million to 22 million.

Total operating income for the second quarter was 36 million. Pro forma operating income, before amortization of intangible assets of 6 million, the stock-based compensation of 10 million and the charge of the restructuring plan of 5 million, was 58 million. These pro forma adjustments caused a comparative operating margin equal to 28.2%, in line with the comparable margin in the second quarter of 28.5%. Other income net was 2.7 million for the quarter. This represents the net amount of our investment income, interest expense and foreign exchange hedging activity.

The third quarter's effective tax rate was 33.4% compared to 36.1% last quarter and 25.3% in the same period last year. The current drop in our effective rate is due to benefits derived from improved operating performance in our foreign subsidiaries. For comparison purposes, in the third quarter of fiscal '05, we had a $4.4 million tax adjustment that reduced the effective rate for both the quarter and for the entire fiscal year 2005. Net income for the quarter was 26 million compared to the prior year quarter of 37 million, a decrease of 29%. However, the prior year quarter did not include share-based compensation, the one-time severance charge, and also included the tax adjustment I just described.

On a GAAP basis, the diluted earnings per share for the quarter was $0.40, which includes $0.10 of after-tax expense from our share-based compensation and $0.05 of after-tax expense from the cost related to the restructuring plan announced on June 15. Our average fully diluted share count for the quarter equals 65 million shares versus the same period in the prior year of 68.5 million and 66.8 million shares last quarter. As Tom, mentioned, we reported 94 million of bookings for the quarter. Although this was less than the 155 million that we reported in our previous waterfall report, our third quarter bookings yield was 23%. This was an increase over the 20% bookings yield from last quarter and from the average yield for all of fiscal '05 of 16%. Tom has already given you a full commentary on bookings, so I just won't repeat it again here.

Turning to our balance sheet, we were able to re-enter the market this quarter and continue our share repurchase program, therefore, our cash and investments as of June 30 decreased by 72.5 million to 353 million. This was an increase from the 288 million reported as of September 30, 2005. This increase is due to cash generated from operations, proceeds from employee stock options and employee stock purchase plan activity, all offset by capital expenditures and dividends.

Our property and equipment balance was 55 million compared to the 48 million reported as of September 30, 2005, fiscal year end. The increase is the result of our normal purchases of computer hardware and software as well as from the build-out of our new data center facility in Minneapolis, which represented just over 10 million of our quarterly capital expenditures. As we discussed in the past, the completion of the data center in Minneapolis will allow us to begin consolidating all of our data centers.

We resumed our share repurchase program this quarter. Remember, we were prohibited in the past few quarters from engaging in share buybacks due to the now abandoned acquisition. This quarter, we were able to purchase approximately 3 million shares at an average price of $37.70 per share. Finally, we have 47 million remaining under the 200 million August 2005 authorization. Of course, should the market still present us with the opportunity to purchase shares in excess of the remaining authorization, we would address the option of expanding the authorization with our Board of Directors.

Looking at our staffing levels, our total full-time equivalent headcount at the end of the quarter was 2,840, compared with the 2,876 at the end of last quarter. This includes approximately 210 sales and client partner positions that have a quota-based compensation program. While the headcount number cited here reflects a decline of 36 full-time equivalents for the third quarter, they reflect an overall decline of 140 full-time equivalents from June 1 and essentially returns our headcount level to where it stood at the beginning of the fiscal year.

Also, I want to reiterate Tom's comments on our June 15 restructuring plan call where he stated that this restructuring would ultimately add skills appropriate for a client-centric model in place of skills needed for a product-centric model and wouldn't necessarily eliminate a net number of positions.

Now for our fourth quarter guidance, we expect revenue of 207 million. Our waterfall revenue report demonstrates that we believe we have a baseline forecast heading into the fourth quarter of approximately 186 million. We would anticipate generating 21 million in new revenue from new bookings of roughly 122 million. This $21 million in new revenue will primarily come from license revenue and from professional services. Fourth quarter's estimated revenue of 207 million will be about 170 million from our product segments and 37 million from our consulting and implementation services practice.

As previously mentioned, we have made the decision to vacate underutilized leased property during the fourth quarter. This action will result in a fourth quarter charge of approximately 8.4 million after-tax or $0.13 per diluted share. This cost represents the present value of the difference between our current lease obligation and prospective sublease income over the remaining life of the lease. We also estimate that this action will reduce our annualized rent expense between 2.3 million to 2.8 million after-tax due to lease termination in 2012. You should also note that the subleasing of the space will add approximately $2 million of annualized cash flow over the remaining lease period.

As for earnings per share guidance, we anticipate our fourth quarter GAAP earnings per diluted share to be approximately $0.33, including the after-tax compensation expense related to FAS 123 of 7.1 million or $0.11 per diluted share and the charge associated with vacating the San Rafael real estate of 8.4 million after-tax or $0.13 per diluted share. The GAAP EPS for fiscal 2006 is expected to be $1.56 per diluted share after the share-based comp expense, abandoned acquisition charge, restructuring charge, and excess real estate charges. And the pro forma EPS, excluding all of these items, is expected to be $2.16 per diluted share as Tom mentioned.

With that, I'll turn the call back over to the operator and we'll begin our question-and-answer period. Thank you.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question will come from Thomas Ernst of Deutsche Bank.

Thomas Ernst - Deutsche Bank Securities

Good afternoon and thank you. I apologize for the background noise. I'll try to mute out. Just one question, Tom, you mentioned or you put out the press release on the restructuring efforts. We saw a similar initiative, or I shouldn't say similar, we saw a separate initiative a couple of years ago to kind of matrix align the sales force. Can you compare, contrast, and maybe explain how you think lessons learned from that initiative will give you some stronger success with this one?

Tom Grudnowski

Yes. Okay, yes, the simple answer is in the older instantiation of our organization, we had all of the sales teams reporting up to one leader and we had the P&Ls reporting to different leaders. In this new instantiation, all of the sales teams have been allocated directly to the integrated client networks or the P&L team. So major change number one is total focus and agreement on what the sales organization should be working on, whereas before there was a couple of different parts of the company you have to debate that with. Second change is we've learned, as we've become more of an enterprise sales company, which has been our mission for several years now that we needed to create a sales process and sales skills more akin to larger technology companies that have professional services organizations. And so we introduced actually a couple of years ago a concept called client partners and now in this new organization, we're recruiting more of that level of skill and we're integrating the sales organization into those client partners. So, for an individual client, there is a client partner now and a variety of sales individuals who might be helping that client partner. So, we've made accountability clearer and we're changing, we're upgrading in a sense, the sort of solution-oriented skills that are required to this more complex enterprise-level sales process. So --

Thomas Ernst - Deutsche Bank Securities

That's pretty clear. One follow-up to that. The quick customer feedback I got on that was this is obvious. We're surprised they didn't do it earlier. Why did it - why didn't you do it earlier if this was kind of obvious to customers?

Tom Grudnowski

Because I was afraid. We're such a product-oriented company. The product focus of this company is buried deep in the DNA and so the switch from a product-focus to a customer-focus could only really been organized when I was as confident that we had enough skilled client-facing individuals, external from the product organization. And as you know, we've been working on that for two years, hiring lots of client partners, hiring more sales folks, etcetera. Before in the old organization, some of the leaders in sales were also some of the leaders in products. And so what we now have effectively is two dimensions of our organization, the old product organization, which is just as strong as it's always been, but now the client facing organization, they'll be calling a little bit more of the shots if you will at the proposal level. So, I now have enough confidence after a couple of years building the sales and marketing and rainmaking division, if you will, the proposals, I have enough confidence that we could now make a switch or a little bit of a switch if you will. So the people calling the shots at the client level now are not just our product experts but they're the client partners, along with our product experts. So, I was afraid to do that without feeling pretty confident that we had a strong sales organization, a strong client partner organization. I now believe that and hence the switch. And quite frankly, since we sort of rotated the tires this quarter while we were driving the car, I'm pretty pleased with the results that, I think the opportunity here for, if the management team wasn't strong enough, if it didn't turn out that we had that strength, we probably would have had a much harder time than we ended up having this quarter. So I'm quite frankly pretty happy with the fact that we pulled it off. It was the biggest change we've had organizationally in at least two years.

Thomas Ernst - Deutsche Bank Securities

Okay, makes perfect sense. Thank you.

Tom Grudnowski

Okay.

Operator

Your next question comes from Brad Eichler of Stephens Incorporated.

Brad Eichler - Stephens Incorporated

Hi, good afternoon, Tom and Chuck.

Tom Grudnowski

Hey, Brad.

Brad Eichler - Stephens Incorporated

Question for you on the, you made a comment about international being 53% of bookings this quarter?

Tom Grudnowski

Yes.

Brad Eichler - Stephens Incorporated

What was that a year ago?

Tom Grudnowski

Good question.

Chuck Osborne

We'll -- give it a minute, we'll get it for you.

Tom Grudnowski

We'll try to figure that out. Actually, it would be -- probably a better number I should try to rather there was a comment about this quarter, it'd probably be more interesting to find out what they were year-to-date. And so, while we do that, give me another one.

Brad Eichler - Stephens Incorporated

Here is my question. My question is, is even if international, I mean, with bookings being down, even if international was the same, which I don't think it was. I mean I think it was a lower amount a year ago but I just can't seem to put my finger on it. It just seems to me like there's a pretty dramatic slowdown in the U.S., and I guess the hard thing that I'm trying to reconcile is exactly what's going on domestically because when I listen, it sounds like you're having a lot of good success, it sounds like you're having wins in a lot of the key areas, yet the booking number seems to be trending down and I guess a more alarming sign as it relates to the future is, is that the bookings yield is rising, which seems like it makes the contribution to the future lower. And so, any thoughts on that?

Tom Grudnowski

Well, one of the reasons that the yield was increasing is, as I said a few quarters ago, this fiscal year we're motivating our sales organization based on revenue, not just based on bookings. So the fact that the yield is going up is fairly predictable. Number two, we spent a lot of time with our customers debating adding these years on and we're trying to make the sales cycle go a little faster. So, our renewal rate is very, very high in general, so delaying things just for trying to add a year or two didn't really make a lot of sense to us. So that's -- so the booking number is probably going down as a -- more a function of sort of the way we're going to market now as opposed to some market trend. I actually think that's good. So, what else? I was trying to give you this number, it was 20 -- the 53% number was up 22% a year ago same quarter. So -- and you're right, Brad. Our growth is probably -- if we did the North America not including Canada blah, blah, numbers, the growth of North America isn't growing, is slowing, there's no question about it. And we're picking it up by having faster growth internationally and that's been a trend that has been going on for quite a while and I'm sure that will change, although our EDM and myFICO growth right now is primarily coming from North America. So, it's sort of two dimensions. Falcon and TRIAD, which are very, very dominant in North America are now growing principally internationally. So the reason you're seeing lots of international bookings is our success in selling existing products in new markets, which is a relatively low-hanging fruit for us. And then, EDM is sustaining our growth in North America because we're selling more - we're doing custom projects. PS is growing here and our EDM product line is growing here. So, you're right. Growth in North America is slowing overall because our legacy application products are growing faster overseas, which is very predictable, which is -- shouldn't be surprising.

Brad Eichler - Stephens Incorporated

Okay, two just quick follow-on questions. First of all, you mentioned something about consumer 16 million, what has that been in the past couple of quarters? How is that number…?

Tom Grudnowski

The last couple of quarters have been just barely up a little bit. So we sort of hit a new plateau and we haven't gone above it. We think that's going to change with some new products that are going to come out, one, in particular is coming out soon, we'll see if that has an impact. So, that's been holding its own. The good news there, what's happening is we've been substituting recurring subscribing products for one-time products or we've been focusing this fiscal year on the recurring monitoring products and less on the one-time, get your score, credit report products. So we're getting good traction there. And I think the key to success there for us is simply more creative products, which we think we have some ideas on and hopefully that will provide some renewed organic growth in next year.

Brad Eichler - Stephens Incorporated

Okay. And then finally, what's -- just out of curiosity, what space are you vacating?

Chuck Osborne

We are -- former headquarters office building in San Rafael, California. It's one part of our facility in Northern California.

Tom Grudnowski

Yes, there are several buildings that we've had there for a long time. We vacated one of -- the major building, we're still in, we've been in for a long time and we're going to stay in for a long time. There was one building that was across the street that we vacated here a couple of years ago, I guess. Now, there's another building that's next to the building we're in that's under-utilized and we're simply moving people into the major building, so we don't a secondary building if you will. So, it's something that makes sense to do right now, especially with some of the changes that we made recently in restructuring.

Brad Eichler - Stephens Incorporated

Got it. Thank you guys.

Operator

Your next question comes from Michael Nemeroff of Wedbush Morgan Securities.

Michael Nemeroff - Wedbush Morgan Securities

Hello?

Tom Grudnowski

Hello.

Chuck Osborne

Hello.

Michael Nemeroff - Wedbush Morgan Securities

Hello, hi guys, how are you?

Tom Grudnowski

Great.

Michael Nemeroff - Wedbush Morgan Securities

Just a couple of quick questions. Can you break out kind of roughly, I know you don't -- haven't provided us in the past what the professional services revenue was relating to the EDM projects?

Tom Grudnowski

We don't usually do that, so I won't change my mind today. What we do, professional services this quarter overall, as you can see in the segment report, was a little bit, I think, down quarter-over-quarter a couple of million, but in the EDM space, it's doing good. So -- but that goes back and forth based on our -- what big jobs we're working on, which ones we're finishing, which ones we're starting. Overall, our professional services run rate is up significantly from a year ago and we see that continuing. We anticipate this quarter that's going to improve. Again, as I said earlier, we've had some pretty major engagements. We actually just did one here the other day, actually in this quarter, which is a multimillion-dollar consulting arrangement in the analytic space, where we're actually staffing the project up as we speak. So, when we have a nice backlog early in the quarter, we're able to spend the hours and that's what's happening this quarter. So, we anticipate, it will be -- it will grow this quarter.

Michael Nemeroff - Wedbush Morgan Securities

Okay. Was it double digit up from last quarter would you say?

Chuck Osborne

From a year ago, 37 over 33 as we cited in the call. So, -- 4 million on 33. So, yes, double digit and I think you should expect the same sort of growth rate in the fourth quarter as we cited in the guidance.

Tom Grudnowski

Right.

Michael Nemeroff - Wedbush Morgan Securities

Okay, and then competitively, I know that there's been a lot of talk in the investment community at least about Vantage Score and its impact on your scoring business. Now that you're in a public forum, could you give us what you see Vantage Score, how you see it playing out and is it having any impact on your scoring business? Are you seeing it competitively in certain situations at all?

Tom Grudnowski

So far, it hasn't had an impact yet. And we're working on some strategies to deal with that and I'd just like to leave it at that. And actually we're -- the comment I was trying to make today, was maybe proactive and reactive was we're getting lots of traction on scoring products that don't involve those partners. So one of our strategies has been develop a FICO Score that we can use globally that's working, that doesn't use their data. We're developing the Expansion score where we actually sell the scoring particularly to the underserved market that doesn't use their data. So -- because the underserved market doesn't -- they don't have the data for that market. So we're trying hard to continue to be innovative and lead the scoring world in new and exciting ways. And that's probably -- I should probably just leave it at that until we actually have some specific products and results to talk about. So at this point, we haven't seen an impact at all.

Michael Nemeroff - Wedbush Morgan Securities

Okay. And then just one final question, I know it's a little early but, for next year, what kind of organic growth do you think the business is really capable of conservatively?

Tom Grudnowski

Well, capable is one thing, what one can execute to is another and I'm going to talk about that next call. So, I always do that in the end of the fourth quarter call. So stay tuned for that one next quarter.

Michael Nemeroff - Wedbush Morgan Securities

Okay, thanks guys.

Operator

Your next question comes from Phil Mickelson of JP Morgan.

Phil Mickelson - JP Morgan

Yes, I just had a quick question about the bookings levels, obviously -- just trying to understand the magnitude of kind of projected bookings versus actual bookings. How much of that was just due to the restructuring in terms of sales disruption? I think you spoke to it and maybe you can give us a little clarity on the large deal that slipped and how big of a number that could be…?

Tom Grudnowski

Actually, I want to do that one quick. I mean that was actually a multimillion-dollar deal that we'll get this quarter, that we didn't get last quarter, that we thought we were going to get last quarter, and then we would've looked like heroes. But that happens on occasion. So, I think the key point here is the number of opportunities and the -- if you take the financial implications of the proposals that we're working on right now, they've never been bigger and the timing of when we get a big deal done is in the bookings. As you can tell, these booking numbers jump around a lot every quarter, sometimes 150, 120, it's 90. They jump around a lot, and it depends on when you will get those $10 million plus bookings. So this quarter we just had a lot of them in progress, we didn't get a lot of in and hopefully, next quarter, we'll get some of the bigger ones in. So I think it's a bad -- I think quarter-on-quarter look at it isn't good. If you look at it on an annual basis, it looks like our bookings overall this year will be a little bit less on an annual basis than they were last year but we're going to get more revenue out of it. So I think that's just a -- I think we're just getting more effective at really trying to wrestle the ground deals that we can get revenue growth on rather than rewarding someone for a 10-year deal that's $1 million a year and doesn't provide a lot -- that's sounds like a - that's a $10 million booking but in revenue that's $1 million, right? So I better go wrestle down the $10 million booking, that's $10 million of revenue this year, right? So I think as we try to focus the organization on organic revenue growth and not just bookings growth, I think you're seeing -- I think this naturally is going to continue where the revenue yield will keep going up because everybody in the company is focused on revenue and not just on bookings.

Phil Mickelson - JP Morgan

I agree it's erratic but it seems to me that the bookings level seems to be kind of bouncing lower and I guess I'm still trying to understand how you can be so far off as far as trying to gauge where the number is going to be going into a certain quarter. And then secondly, I understand that you said, it seems like I'm still having troubles kind of reconciling prior commentary a few quarters ago where we're trying to find longer-term deals with bigger numbers with longer contract terms versus now it seems to be the opposite. So I guess I'm still trying to figure out what that exactly means.

Tom Grudnowski

I actually think I could sum it up this simply and I'm not trying to be cute. Fair Isaac is really focused on revenue growth and not on bookings. And therefore, the incentive systems, the management reporting, what I worry about everyday when I'm looking at proposals, working with customers is that, and I think that in the future that'd be a good way to try to focus on us. And I think in the past, we've always tried -- we've been trying hard to find a predictor for you. We picked bookings a couple of few years ago, we generated the waterfall report and quite frankly, it's turned out to be not the greatest management tool or investor tool for - so I think what I'm trying to say is, I understand what you're saying and we're going to try to work hard on trying to figure out a better management tool to help you predict what's happening at our customers. And yes, and the yield, the revenue yield is growing up per deal. So, that's good, that's really, really good. That's a good thing for our shareholders.

Phil Mickelson - JP Morgan

Beyond the scoring competitive threats, there's always been ongoing kind of thought, competitive issues with TRIAD, also within your whole Fraud segment. Can you comment on, like, the pricing and the deal renewal rates within your customer base for those products?

Tom Grudnowski

Yes we are -- for the big -- for our franchise products, we still win, we still command a premium price and we're still leaders. And of course, we have competitors and they fight very, very hard everyday and we're fighting hard, too. So --

Phil Mickelson - JP Morgan

Is the premium price being that's -- the same pricing that you'd have seen two or three years ago on those products?

Tom Grudnowski

Actually on some of them, it's actually higher. In fact, for TRIAD and Falcon, we have very, very high market share. So as new customers come onboard, it's recognized as the best products. So there's no question about that. So we're not - we're not giving it out, if we're in a competitive situation with someone who's giving their software away, we don't give it away we lose. And we hope that after they try and fail with another product that we get it back some day. So we're trying to be the premium product, not the commodity product.

Phil Mickelson - JP Morgan

Okay. Thank you very much.

Operator

Your next question comes from Tony Wible of Citigroup.

Tony Wible - Citigroup

Hi, guys. I was hoping we could start off by going into the backlog. I was hoping you could disclose the size of the new bookings backlog.

Tom Grudnowski

New bookings backlog, no. I have -- we have internal management planning that takes all the customers that we're at and puts an expected value on them and it's really, really big. It's enough to generate revenue for the fourth quarter and beyond, and we've never given a number like that out before. So, -- waterfall.

Tony Wible - Citigroup

Is it safe to then -- safe to say that there's more than two years of new bookings in that backlog at any given time?

Tom Grudnowski

Yes.

Tony Wible - Citigroup

Okay. Just trying to make that known.

Chuck Osborne

Tony, we track our sales effort by an extensive staging process that takes it all the way from inquiry to contract. And we manage the sales force through that staging process, our sales management looks at it. And yes, it has multi-year bookings levels in it. Obviously, one of the reasons we don't get into that detail, it tells how we manage the sales force and it also shows some of our competitive efforts in advance of the impact that it has on competitors and customers and we just don't disclose it.

Phil Mickelson - JP Morgan

Thank you. The guidance that you guys have provided for the fourth quarter, I just wanted to clarify, does that assume the full restructuring benefit is baked in or will that be partly baked in the fourth quarter and then see more of that carry into next fiscal year?

Chuck Osborne

You'll see, as I said in my comments, some of the terminations had transitional periods and extended into the fourth quarter. So we won't see all of it. The other thing that -- but we do in the fourth quarter begin to realize the full benefits now. By that, I would not want you to simply remove 5.4 million from operating expense there -- or 5.5 million, 22 million divided by four because as Tom indicated even on the June 15 call, we're replacing some of that with other client-centric skill sets. We've been recruiting client partners and others who will take in some of these positions. Actually, in our call on the 15, Tom didn't actually commit to any net reductions even though we have achieved some. So you wouldn't want to just take that single vector in reducing operating expense. But you will see an impact, you'll see an impact in personnel costs and that will be spread throughout our financials.

Phil Mickelson - JP Morgan

Okay. The big contract that you said was deferred, have you guys signed that contract to date in this current quarter?

Tom Grudnowski

Not yet.

Phil Mickelson - JP Morgan

Not yet, okay. And then lastly, this one's a little bit more of a kind of theoretical question but, there's obviously a lot of discussion between Vantage competition and many other factors, just depending on the day of the week it seems like. But yet, when I guess, we look out at the guidance levels, sorry, not the guidance but the consensus levels that are out there, there seems to be a pretty broad range, I guess. Can you provide some qualitative comments about what you think would cause you to either be towards the higher end or lower end of the ranges that are out there?

Chuck Osborne

I think we have had a number of shifts in analysts covering Fair Isaac and as a result, the consensus bounces around a little bit -- as I should say, the analysts points bounce around a little bit based upon the extent to their knowledge of Fair Isaac. And as I'm sure you know, when someone first picks up coverage or rewrites a report, they spend a fair amount of time with John and with me and they may come in and visit Tom and it takes some while to get up to speed. And so, that's why you do see some volatility in these estimates. Frankly, you also see varying points of views and opinion on the effect of apparent competitive threats like Vantage Score and so forth. And depending on their familiarity with the industry, they will bake some of that in and then they'll take it out later and as a result, the numbers tend to move around.

Phil Mickelson - JP Morgan

So, I guess just to be clear, I guess your guidance has been relatively consistent. I guess when we look at the fourth quarter implied $0.57 number, that's a true number. It's not as though you guys are being conservative with that number?

Chuck Osborne

I think we have increasingly, as you've noticed, have tried to put some conservatism into our numbers. We have a number of things that we can do to help, frankly, to make sure that we get to a number. I think if you were to -- I don't think it's any secret -- if you look at our ability to predict revenue versus our ability to predict earnings, there's a little bit of a diversion there. We seem to be a little more accurate on earnings than we are on revenue. But…

Tom Grudnowski

Not by very much in percentage points I might add.

Chuck Osborne

We only missed the revenue target by what, 2% -- less than 2%.

Phil Mickelson - JP Morgan

Last question, and I'll jump off, is the marketing and insurance businesses. What would have the Strategy Machine's growth rate been ex that? And is there anything strategic just to continue to follow up with the perennial question that you guys are considering with those two units?

Tom Grudnowski

Yes. Actually, the good news is both those are now holding their own in the whatever [after scene] was happening, isn't anymore. And so, there's no bleeding, they're making money there, they're holding their own. And we still, my perennial answer is both of them are still - we're talking to some potential partners about some cover ideas and we still haven't executed them. So, there's no news there.

Phil Mickelson - JP Morgan

Great. Thank you very much.

Tom Grudnowski

Thank you.

Operator

Ladies and gentlemen, that's all the time we have today for questions. Mr. Grudnowski, I will turn the call back to you for closing remarks.

Tom Grudnowski

Thank you. Thank you very much. Talk to you soon. Thanks, bye now.

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Source: Fair Isaac F3Q06 (Qtr End 6/30/06) Earnings Call Transcript
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