Several firms comment on Fair Isaac (NYSE:FIC) after the co last night issued a warning for FY07:
- Citigroup is downgrading the stock to Hold from Buy saying that while the news will help establish a conservative base of numbers for FIC to grow off of, they do not see any catalysts in the stock as the market will likely take a more cautious stance on FIC's restructuring and as the firm believes an LBO may be more difficult in the near term given the potential for investor backlash. Firm is trimming their target to $37 from $53 to reflect the lower expectations and lack of near-term catalysts.
- William Blair notes they believe the company has moved aggressively in setting the bar low for the upcoming year.
The company blamed the earnings miss on lower revenue than expected, coupled with negative leverage. Part of this is ongoing fallout from last year's reorganization of the salesforce into vertical industry teams, or ICNs, which is having more disruption than planned. Also contributing was execution failure at the 11th hour, as a number of deals slipped past the March 31 quarter-end, but have been subsequently signed. Finally, a delayed rollout of the newest version of the Falcon fraud product also hindered sales in the quarter. The company blamed softness on bookings in the mortgage, fraud, and insurance bill review verticals; however, it did not attribute softness in the subprime mortgage sector for any revenue weakness. It also reported that it has not seen any attrition in FICO scores from the Vantage Score.
The new CEO Mark Greene said on the follow-on conference call that the quarter's weakness was a surprise, but that the reasons for the weakness are not. In follow-up conversation, he describes himself as disappointed in the quarter but in no way discouraged in his vision, and ready to move past this quarter and begin moving forward.
The new CEO's evaluation, after meeting with customers and employees, is that the company still maintains a reputation for cutting-edge analytic products, but has developed a reputation to be arrogant and difficult to work with. This confirms what the firm has heard in industry contacts. Even so, Dr. Greene's estimation is that clients and prospects want to do more business with the company, but need the whole customer experience enhanced, from marketing to sales contact to simpler product bundles to after-sale support. One example of movement in this direction is that the company now has senior executives assisting in relationship building and selling at its top 25 clients.
William Blair thinks these moves are all positives and reflect needed changes, based on their conversations with people in and around the company. the challenge will be getting them to bear fruit, particularly as measured by improved organic growth, where the new CEO sees success as moving nearer to industrywide growth rates in the high-single-digit range, with EPS growth supplemented by operating leverage and share repurchases. But they think the worst is now behind the company and that the next year will bring slow improvement to financial results.
- JP Morgan notes that somewhat surprisingly, management indicated on the follow-up call
that 2Q's revenue shortfall was more execution driven than cyclical. The revenue impact was largely from the change in sales approach and the Falcon upgrade delay. Management, under the new direction of Mark Greene, could be setting the FY07 guidance bar low after numerous earnings misses in recent years.
Mark Greene named a new COO and Chief Technology Officer. JPM likes the reorganization of the sales force but the changes, including training and new support teams, could take
time to implement.
Reiterates Neutral, with FIC trading at 24.7x F2007E EPS. While they believe management could be setting the bar low, they expect the sales 'reorganization' to take time to effectively execute. In addition, there could be cyclical pressures on segments in the coming quarters. After substantially reducing 2007 guidance, FIC is trading at the high end of its historical 15-25X forward 12-month EPS.
- JMP Securities says that although the numbers are clearly disappointing, the firm was encouraged by the new CEO's direct approach in recognizing the customer issues that the company has developed over the past years and in his vision to address these issues. Further, they believe that his vision to refocus Fair Isaac around its core products and away from a professional services focus also plays to the company's historical strengths.
Although in JMP's view the company now has the right vision, they also believe the execution of this plan will take some time with management looking to 1Q08 (December 2007) before it will begin to see the benefits of this turnaround. For FY07, they are lowering EPS estimate from $2.11 to $1.62. For FY08, they are lowering EPS estimate from $2.40 to $1.79. Maintains Mkt Perform rating.
Notablecalls: Must say I've had FIC on my radar as a potential short for some time already with sales force reorganization being the first red flag. Often enough, these reorganizations act as the canary in the coal mine, signalling problems to come.
I think we can safely assume FIC can generate EPS of around $2 in FY08. The stock ended at around $36 in after hours action implying an EPS multiple of about 18x. Given the seemingly s-t nature of FIC's problems, that's not too much. I really liked the comments of CEO Mark Greene regarding getting the house in order. Citi's downgrade (and there may be others) will hopefully push the price toward the $35-$35.5 levels, providing a possible buying opportunity for aggressive accounts.