Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  
TRANSCRIPT SPONSOR
Wall Street Breakfast

Fair Isaac Corporation (FIC)

F3Q07 2007 Earnings Call

July 25, 2007, 5:00 PM ET

Executives

John D. Emerick, Jr. - VP and Treasurer

Mark N. Greene - CEO

Charles M. Osborne - VP and CFO

Analysts

Mark Bacurin - Robert W. Baird & Co., Inc.

Tony Wible - Smith Barney Citigroup

Brett Huff - Stephens Inc.

Garrett Bekker - Merrill Lynch

Frederick Searby - JP Morgan

Presentation

Operator

Good afternoon. My name is Lakita [ph] and I'll be your conference operator today. At this time, I would like to welcome everyone to the Fair Isaac Quarter Three Earnings Release Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks there will be a question-and-answer session. [Operator Instructions]. Thank you Mr. Emerick, you may begin your conference.

John D. Emerick, Jr. - Vice President and Treasurer

Thank you Lakita and good afternoon everyone. This is John Emerick of Fair Isaac and thank you for joining us for our fiscal 2007 third quarter earnings. We issued a press release after the market closed this afternoon and you may access it on the Investor Relations page on our website. A replay of this call will be available on our website approximately two hours after the completion of the call through August 22nd. I would 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 risk and uncertainties which could cause actual results to differ materially from those expressed and/or implied by these statements.

Additional information concerning these risk and uncertainties are described from time-to-time in our SEC filings including our annual report on Form 10-K for the fiscal year ended September 30th and our quarterly report on Form 10-Q for the period ending March 31, 2007. Fair Isaac disclaims any intent or obligation to update these forward-looking statements. Fair Isaac, however, reserves the right to update all information including forward-looking statements or any portion thereof at any time for any reason. A reconciliation of pro forma information that we provide to the most comparable GAAP information is posted on the presentation's page found within the Investor Relations portion of the Fair Isaac website.

On the call with me today are Mark Greene, our Chief Executive Officer; and Chuck Osborne, our Chief Financial Officer. Once we have completed our prepared remarks, we will open the call for questions.

Now, I'll turn the call over to Mark.

Mark N. Greene - Chief Executive Officer

Thanks John. Thank you all for joining us on the call today. On our last earnings call, I laid out for you both the challenges and opportunities facing our Company and what we need to do to get back on the track for growth. While we still have a lot of work to do in the months ahead, today I would like to review with you our results and the progress we are making towards this goal. This quarter we reported fully diluted earnings per share of $0.42 versus the $0.33 to $0.38 that we guided last quarter and the $0.40 we reported in the same period last year.

Revenue was $205.8 million with net income of $23.8 million. Our core products such as Scoring, Debt Manager and Falcon performed well this quarter. In summary, our year-over-year revenue as reported decreased by roughly 1% and our GAAP earnings per share increased by 5% over the same period of the prior fiscal year.

Adjusted for the March 2007 sale of our mortgage product line which had previously contributed approximately $4 million per quarter, we experienced flat to marginally positive revenue growth in the third quarter. While the results for the quarter were better than we guided, we still have substantial work to do to deliver sustainable grow. As I discuss later in the call we believe we have a solid strategy in place to enhance our growth prospects and to deliver increased value to our shareholders. But before I discuss this plan, let me first update you on progress that we made on several issues outlined last time, issues affecting both our company and the industry overall.

I'll begin with sales. We previously communicated that our sales organization was disrupted by last year's change from a product aligned sales model to an industry aligned model. We stated that Fair Isaac is pursuing a client-centric strategy emphasizing software product sales supported by high value professional services. I am increasingly confident that this refocus strategy together with our continued emphasis on improved customer service will boost both revenue and margins. To execute this sales strategy, we recently brought on board a world class Head of Sales, Greg Corgan, who previously led sales at CA and was also formerly a Senior Sales Executive at IBM. In Greg's [ph] sales organization we have accomplished a few things over the last quarter. We have added almost 40 client support managers and client partners to improve our coverage and support. We have developed a new strategic account program where senior Fair Isaac executives are assigned as sponsors for each of our top 30 global clients.

We've launched a complex deal pursuit team to drive multi-product proposals for sales opportunities larger than $1 million and we've completed our first ever formal client satisfaction survey with the results due next month along with specific recommendations for improving client service. During the quarter we also implemented our previously discussed streamlining of the sales organization, reducing the number of industry verticals from nine to five. Those are financial services, insurance, retail, telecommunications and healthcare. We have shifted resources from other industries to support these five focused verticals, verticals where we believe we have strong offerings, compelling value propositions and demonstrable market traction. Now supplementing these efforts in direct sales we've also launched during the quarter a formal indirect sales channel led by our new Vice President, Alliances and Partnerships, Bob Verini [ph]. Bob joins us from IBM where he played a similar role overseeing worldwide financial services partnerships. Bob's team is now driving global alliances at Fair Isaac with IBM and other leading systems integrators using a blended services model that combines third party consultancy with our own product related professional services team. We're building a robust pipeline of joint opportunities and we're optimistic about growth prospects from this partner channel.

Let me turn now to our professional services organization where Dick Stewart's team has made significant progress in integrating the professional services unit, improving resource allocation and hiring additional talents to staff or engagements. We currently have 483 active full time consultants an increase of 67 FTEs or 16% just my first report to you in March. Contracted resources have also ramped up in this time from 55 to 94 current contractors. Now these are strategically added resources in our professional services organization especially in high skill areas such as modeling and analytics with the intention of lowering our utilization rates towards industry norms, better aligning with our sales teams and ensuring an adequate bench of talent to meet customer demand.

Our PS organization is also rationalizing as portfolio service offerings, which are now designed to help customers use our software solutions to their full potential. We have repositioned the PS team to focus on our software assets rather than on the spoke development or general purpose management consulting as in the past.

Turning now to product development and management. Fair Isaac's products have always maintained a cutting edge reputation and they still do today, so we can do even better. Our technology team has several efforts underway here. First, during the quarter we completed the integration of our product management and development teams unifying these efforts under a common management structure.

Second, Product Management Head, Mark Laden [ph], has begun a rationalization effort to consolidate our current portfolio of over 160 products into 40 simpler and easier to understand solutions. This streamline structure will benefit both our clients and our sales teams. Third, our CTO, Bernhard Nann, has deployed a common development methodology: tooling, architecture and quality assurance process across all the development teams. To ensure that we remain a world class development organization, Bernhard has also recently hired Olga Miller [ph] formally with Oracle and SAP as our new Head of Development. Finally in this area, to ensure that our products continue to benefit from our rich pipeline of innovation, we have tapped Andrew Jennings to assume the leadership of our research initiatives. Taking over from Larry Rosenberger, who remains with Fair Isaac as an analytic science fellow.

And we move next to our strategy around Enterprise Decision Management. As I have noted in the past, EDM is at the heart of our growth strategy and it's really a very compelling idea, helping companies to know what they know in order to make smarter decisions across the enterprise. The idea behind EDM is to tie all of the pieces together, allowing companies to move beyond traditional business intelligence, to much more dynamic forward-looking decisioning system. It's therefore important that I mentioned progress in one metric with both operational and strategic significance, mainly, market acceptance of our EDM strategy in concept.

Since we rolled out our EDM architecture and product road map last quarter, we have seen considerable interest for many of our largest clients. I am happy to report that several leading institutions and diverse geographies have recently made strategic commitments to this road map with multi products, multi-million dollar purchases that represent design wins for our EDM strategy. Examples include Grupo Santander across several institutions in Spain, Europe and Latin America. Akbank in Turkey, Alpha Bank in Greece, Banco de Crédito del Perú, and two of the largest financial institutions in the UK.

A further indication of our success with EDM is a recent win at the Department of Defense where we are helping around issues of purchase card abuse, misuse and fraud. This is a multi-year, multi-million dollar contracts with numerous opportunities for expansion. As these examples demonstrate, we'll be helping institutions to automate, improve and connect decisions across their enterprises, just as our EDM vision promises. And our sales team is actively working to secure further such large scale EDM commitments from additional clients.

Moving on to some of our strategic initiatives, I discussed last quarter that our strategy team is passed with identifying key areas of strategic focus and ensuring that we optimally invest to achieve long-term growth. The team is following a disciplined approach to evaluating investment priorities, resource allocation, competitive landscapes and market dynamics. One priority of this strategy team is to ensure proper investment in our five focus industries. For example, in support of our healthcare vertical, in May we entered into technology licensing and developing relationship with Healthcare Analytics Inc. or HAI. HAI is a private company focused on a range of revenue cycle activities with hospitals and healthcare providers. We have participated as a minority investor, which is reflected in our financials. And HAI has licensed Fair Isaac technology that will have useful application in healthcare revenue cycle management. We are excited about our arrangement with HAI and expect it will add to our growth well into the future.

Another priority of our strategy team is geographic growth. Most notably our expansion in to China. During the quarter we established a subsidiary in China, appointed a Managing Director for that country and opened our office in Beijing. We are now working with four of China's largest financial institutions; Bank of China and China Merchant Bank both of which are existing clients who have broadened their use of our decision engine applications. As well as another top four bank and top three credit cards issuer who have recently selected Fair Isaac to provide fraud management services.

And recognizing the enormous potential of the Chinese market where credit card volumes are growing at 100% a year, this November we will be hosting our Asian interact users conference in both Shanghai as well as Tokyo.

Let me conclude these remarks by saying that collectively these initiatives are designed to boost our open operational excellence to help Fair Isaac maintain it's success as an innovator and to reinforce our leadership position in EDM. The key to getting this all right is to ensure that our teams understand our strategy and have a shared sense of mission. For this reason, management has invested heavily over the past few months in reestablishing a set of core values that emphasize our focus on clients, our commitment to high performance and an emphasis on innovation. The ongoing reinforcement of these values and the accompanying investment in our people and talent development are bearing fruit as we see improvement now in both productivity and employee retention.

In summary, I believe, we are making good progress in building a platform for growth, sharpening our industry focus, pursuing geographic expansion, making good on the promise of EDM and assembling a world-class team. I will now turn the call over to Chuck to provide you with further details on this quarter's financial results. Chuck?

Charles M. Osborne - Vice President and Chief Financial Officer

Thank you Mark and good afternoon everyone. As we stated in our release this afternoon, our revenue for the third quarter 2007 was $205.8 million, slightly above the $195 million to $200 million guidance we provided in our last earnings call and a 1% decrease from the same period last year. Net income for the quarter was $23.8 million versus $26 million in the same period of prior year, an 8% decrease. However, we reported fully diluted GAAP earnings per share of $0.42 for the third quarter against our guidance of $0.33 to $0.38 for fully diluted share. This is an increase of 5% from the [ph] prior year quarter. The bookings for the third quarter were $90 million from which we generated $18 million of current period revenue as compared to the guidance provided of $55 million to $75 million in bookings with $15 million to $20 million in current period revenue.

Now, let me walk through some of the more specific financial details. Turning to our segments, our revenue contribution by market segment is as follows: Scoring contributed $47 million or approximately 23% of the total revenue for the quarter against $44 million or about 21% of revenue in the same quarter last year. Scoring revenue for this quarter reflects an 8% increase on a year-over-year basis, mainly the result of higher volumes from the credit bureaus. Strategy machines contributed $113 million or about 55% of total revenue against $115 million or about 55% of revenue in the same quarter of the prior year.

The Strategy machine revenue represents a 1% decrease from the prior year due to the divestiture of the mortgage product line sold last quarter. Slight declines associated with customer management originations offset by a strong quarter in collections and recovery. Analytic Software Tool totaled about $10 million or 5% of the total revenue for the quarter as compared to $12 million or 6% of the revenue in the same quarter of last year. The 15% year-over-year decrease was due to a decline in revenues generated from the sales of the Blaze Advisor and Model Builder products.

The Professional Services segment of our business contributed $35 million or about 17% of total revenue for the quarter as compared to $37 million in the same quarter of the prior year. This 4% decrease is primarily due to a decline associated with industry consulting, fraud and collections and recovery implementation services partially offset by an increase in revenues derived from customer management and EDM implementation and consulting services.

Now, looking at our verticals, the percentage of this quarter's revenue by vertical market was as follows: Financial Services vertical was 68%, the Insurance vertical was 9%, Telecom was 4%, Retail was 6% and all other verticals which consist of government, myFICO, consumer branded goods and other miscellaneous categories were 13%. The Company's transactional or recurring revenue for the quarter represented approximately 76% of our total revenues versus the 75% reported in the same quarter in the previous year and generally on par with the 75% reported at the end of fiscal 2006.

Percentage of consulting and implementation revenues held constant at 17% of our total revenues this quarter. Onetime or license revenue was 7% of our total revenue this quarter, constant with the 7% [ph] reported a year ago. Our international base increased from last quarter to this quarter with approximately 31% of our total revenue base coming from outside the United States. This is an increase from the 30% that international revenue represented in the same quarter of last year.

Now turning to expenses. The breakdown of our operating expenses shown as a percentage of revenue during the quarter was as follows: cost of revenues for the third quarter was approximately 36% compared to 35% in the same quarter last year, which resulted from higher personal cost plus an increase in direct costs associated with the change in product mix. Our Research and Development costs were 8% for the third quarter as compared to over 10% for the same quarter last year, which resulted from the continued shift to certain personal to lower cost regions such as India.

Finally, selling, general and administrative costs for the third quarter were approximately 35% compared to 32% for the same quarter last year. The increase was related to compensation cost associated with additional client basing personal, amounts related to commission and incentive plans, marketing costs related to our annual InterACT conference and costs associated with settling an on-going lawsuit relating to our insurance bill review business.

Total operating income for the third quarter was $36 million compared to about the same $36 million in the third quarter of last year. The pro forma operating income was $42 million before amortization of intangible assets of $6 million. This equates to a pro forma operating margin of 21%, a decrease from the same quarter last year, when excluding the restructuring cost in fiscal 2006 and up slightly from the 20% reported last quarter.

Net income for the third quarter was $24 million, down from the $26 million reported in the same period last year. But the increase in 11% from the net income reported last quarter. The resulting GAAP earnings per share of $0.42 per fully diluted share compared to this quarter's guidance is mainly due to higher revenue, a lower tax rate, a lower fully diluted share count, all offset by the higher operating costs already described. Our effective tax rate was approximately 35% for the quarter, improvement in this rate was mainly driven by the increase in our revenue from foreign jurisdictions.

Turning to our balance sheet. Our cash in investments as if June 30, 2007 increased by $3 million to $271 million as compared to $268 million as of September 30, 2006. Primary contributors to the change in cash and cash equivalents include cash provided by operations of $129 million and $77 million received from the exercise of stock options and stock issued under an employee stock purchase plan.

Significant uses of cash during the year-to-date period included $282 million used in our stock buyback activity, which I will cover in more detail in a moment, and $17 million related to purchases of property and equipment.

Finally, I wanted to mention our free cash flow for the trailing 12 months. We define free cash flow as cash flow from operations less capital expenditures and less dividends paid. Free cash flow for the trailing 12 months is currently $145 millions against the $163 million of trailing 12 months free cash flow in fiscal 2006. This decline in attributed to our lower level of cash flow from operations including the use of cash, working capital and a greater amount of capital expenditures related to the data center build-out. I would expect the trailing 12-month free cash flow for the balance of fiscal 2007 to remain consistent with the current level. You should note that improvements in our receivable collection process and a potential refinancing of the convertible debenture outstanding, could have a further impact on our free cash flow.

Net accounts receivable as of June 30 totaled a $179 million, essentially flat from the March 31 balance of $179 million. Our DSO or day sales outstanding were approximately 79 days this quarter compared to 80 days at the end of the second quarter. We remain focused on improving this component of working capital that is impacted by our invoicing process. We also attribute the higher DSO to longer payment terms on certain contracts as international clients. Terms which we believe is an appropriate use of our capital given the financial strength of our client base.

Our property and equipment balance was $54 million compared to the $54 million we reported as of March 31, 2007. This is the result of a net impact from this quarter's $6 million of deprecation expense offset by $6 million of capital expenditures during the quarter. We were able to be fairly aggressive this quarter in the open market and repurchased a total of 2.4 million shares at an approximate cost of $86 million representing approximately 4% of our total outstanding shares. This was done under the current 500 million share repurchase plan that was authorized by the Board in November 2006.

As of June 30, 2007 we still have 218 million remaining under this plan and continue to believe that the repurchase of our stock is an attractive use of our cash. We were also successful this quarter in taking another step towards lowering our cost of capital. As announced in our press release today, we have successfully doubled our revolving credit facility to $600 million with a syndicate of 11 financial institutions. The proceeds will be used for working capital and general corporate purposes, for refinancing of existing debt, for the continued repurchase of our stock and for selected tuck-in or a new platform acquisition.

Looking at our staffing levels, our total headcount at the end of the quarter was 2,760 compared with 2,686 at the end of last quarter and 2,840 on June 30, 2006. This also includes approximately 203 sales and client partner positions that have a quarter based compensation program and we are recruiting for additional quarter based compensations positions at the current time.

Turning now to guidance, our guidance for the fourth quarter of fiscal 2007 for revenue was $200 million and earnings per diluted share of $0.40. Further our stated revenue guidance for fiscal 2007 remains at $815 million, which includes the impact from the divestiture of our mortgage products. From this guidance, we expect GAAP earnings per diluted share $1.71 for fiscal 2007. The GAAP earnings per share guidance stated includes the potential impact from the possible refinancing of the contingent convertible using our expanded credit facility, which is likely to have an all-in interest cost of 5.9% versus the 1.5% rate on the contingent convertible.

For modeling purposes, we have assumed a 36% effective tax rate for the remainder of fiscal 2007 and share repurchase will be consistent with our historic purchase activity. As for bookings, we expect in the fourth quarter, we will need to deliver between $15 million and $20 million of revenue from new bookings in the range of $75 million to $80 million in order to deliver our guided revenue of $200 million. We are currently completing our plan for fiscal 2008. We will share the final results of this process with our Board in August and then issue our fiscal 2008 guidance based on the Board approved plan when we release our fourth quarter earnings.

That concludes my prepared remarks. I would now like to turn the call back to Mark before we open up to your questions. Mark?

Mark N. Greene - Chief Executive Officer

Thanks, Chuck. Let me summarize. As a Company, Fair Isaac's goal is to earn the right to be our client's trusted advisor by delivering solutions that help them make smarter business decisions. With our streamlined product set, stronger sales organization, renewed commitment to our people and high performance management in place, we are now confident that we have the key element needed to achieve this goal, and to execute on our growth strategy.

Operator, you may now begin the question and answer period please. Thank you.

Question And Answer

Operator

[Operator Instructions]. Our first question is from the line of Mark Bacurin.

Mark Bacurin - Robert W. Baird & Co., Inc.

Good afternoon. A couple of questions. Can you hear me?

Mark N. Greene - Chief Executive Officer

Yes.

Charles M. Osborne - Vice President and Chief Financial Officer

Yes.

Mark Bacurin - Robert W. Baird & Co., Inc.

Okay, great. First on the Scoring surprises, you see that rebound as well as it did and just curious if you could... I know you said it through the... obviously, through the credit bureaus. Can you give us any sense of what the big drivers are presumably one originations have been down and I guess risk management type applications have been increasing. So, just looking for little more color on the growth there.

Mark N. Greene - Chief Executive Officer

That's correct. This is fundamentally driven by volume at the bureaus and I have always described this business as a P time Q business, Price times Quantity. We saw good pick-up in Q, the volume of transactions coming from multiple partners during the last quarter.

Mark Bacurin - Robert W. Baird & Co., Inc.

And then do you have any sense of what the underlying demand coming to those bureaus? I mean, what drove that incremental activity?

Mark N. Greene - Chief Executive Officer

I think that among the factors as one you said it which is concerned about risky parts of the market there. You want to hear questions about sub-prime, etc. We do see our clients increasingly looking to FICO scores as a way of assessing risk in a number of market segments.

Mark Bacurin - Robert W. Baird & Co., Inc.

Great. And then been a lot of noise I guess in the press lately about this authorized user issue. Can you just comment on what actions you guys are taking at this point to make adjustments to the FICO score related to the authorized users and what the cost revenue implications of that maybe over next quarter or so?

Mark N. Greene - Chief Executive Officer

Second part of your question, we don't foresee any revenue implications to us. For those not familiar with the issue, FICO scores have long had a feature we sometimes referred to an incident [ph], the piggy backing feature whereby the intent of your inference would be their family members, current benefit by having their parents good credits score reflect favorably on the credit scores of children attending college for instance. That's favorable and intended use of the piggy backing feature has been compromised in a few cases. It's alleged by people in making unscrupulous use of the facility. And bowing to market pressure we have removed that capability from the FICO scores as of September. We recognized this will impose a hardship on many innocent parties but our issuers are demanding that we put this in place to avoid liability for misuse of credit ratings.

Mark Bacurin - Robert W. Baird & Co., Inc.

And is there any reason to think that that specific change has driven incremental volumes on the scoring side as people kind of reassess after that feature had been shut down?

Mark N. Greene - Chief Executive Officer

First of all the feature is not yet shut down, it's effective as of September. And no, I don't see this issue driving volumes, the volumes have more to do with macroeconomic features and not so much the piggy backing issue.

Mark Bacurin - Robert W. Baird & Co., Inc.

Okay, great. And just interesting to hear you talk about the client servicing process just wondering if you had any results back in yet and what if any common themes you are hearing out of that?

Mark N. Greene - Chief Executive Officer

I want to be careful to speculate too much but the early findings are three-fold. People... our clients certainly very much like the products and they like them not just for their functionality but for the strategic value there. The clients also are providing favorable feedback on our people and their creativity and expertise, and they are providing decidedly mixed comments around customer service and support. And we sort of anticipate that and expected that would be the area we want to focus on when the final results are in.

Mark Bacurin - Robert W. Baird & Co., Inc.

Okay, thank you.

Mark N. Greene - Chief Executive Officer

Thank you.

Operator

Your next question is from the line of Thomas Ernst.

Unidentified Analyst

Hi good afternoon. This is actually Joseph Bori [ph] on behalf of Tom. Can you hear me?

Charles M. Osborne - Vice President and Chief Financial Officer

Yes.

Mark N. Greene - Chief Executive Officer

Yes we can, thank you.

Unidentified Analyst

Okay, great. So just following up on the earlier question here, you are saying that you are seeing a pickup in volumes at the credit bureaus. Are you seeing at the same time any pressure from the competition of VantageScore or maybe the pickup in volume in offsetting anything that you can see as a loss through the VantageScore presence?

Mark N. Greene - Chief Executive Officer

Thanks for the question. Well as you noted we just reported fairly strong revenues in that business. And I will also tell you that we like the capabilities of our FICO scores especially in some of the enhancements we have announced in FICO '08. So we like how our product plays in the marketplace in a competitive sense. We do recognize that our customers are looking at a number of alternatives including both competitors and in some cases internally built solutions. That said to our knowledge I don't think, we think we have lost any single customer as a result of those pressures although we are seeing this reflect in some pricing pressure as we engage in proposals.

Unidentified Analyst

Okay, great. And then let me if you allow a follow up with another question. You mentioned in your press release that the... as part of the international expansion you are looking into China for instance and you have set up an office over there. Right now which regions would you say are kind of the next best places where you are going to be expanding successfully? I mean obviously in the U.S. you have a strong presence and probably you have a lot of market as well in the Western Europe. But what are kind of the first, the easy targets you are going after right now?

Mark N. Greene - Chief Executive Officer

Two different kinds of expansion, in the U.S. which you are correct is our largest market, there remains considerable opportunity for cross selling. While we may not acquire many new customers there is lot of opportunity for us to expand our footprint within our existing customers in the U.S.

In terms of new markets, in addition to China, we have a quite a bit of focus these days on India. You may know that we have a substantial presence with nearly 300 people in India but that is largely a sourcing market which supports our operations in other countries. We are now looking to see whether we can leverage that to start selling into India as a domestic market.

Unidentified Analyst

Okay. Thank you very much.

Mark N. Greene - Chief Executive Officer

Thank you.

Operator

Your next question is from the line of Tony Wible.

Tony Wible - Smith Barney Citigroup

Good evening. I was hoping if we could start off by looking at the new bookings this quarter. Can you talk about qualitatively, where you are seeing the pickup in the new bookings? Are you selling more consulting in that mix or is it more of the longer term strategy machine type applications?

Charles M. Osborne - Vice President and Chief Financial Officer

This, it's not really centered in any one product, it's across our product line. I would not say this necessarily in the professional services that will tend to follow price on sales and the tools area. We see an awful... our pipeline, we see great interest as Mark alluded to in EDM and we think that that's going to portend the opportunities here in the future. But right now really all four of our segments show the pickup in bookings in the third quarter.

Tony Wible - Smith Barney Citigroup

So is that bookings timeline like a two to three year timeframe to work through that the new bookings...

Charles M. Osborne - Vice President and Chief Financial Officer

Yes, you may recall in years past as some of the bill review and others were longer than that. But the... as Mark indicated across the industry you are seeing shorter timeframes on contracts. That in itself has an impact on the actual metric or the valuation of our booking. Nevertheless we are gratified by the pickup in current period revenues from this level of bookings which came up from, as you know from last quarter.

Mark N. Greene - Chief Executive Officer

I would add that although four of the segments showed pickup, probably strategy machine showed the largest pickup in consulting.

Tony Wible - Smith Barney Citigroup

Okay. Good, good. The last quarter I guess, did you guys see any slippage from last quarter into this quarter's bookings? And also at the end of this quarter, have seen any carryover prospects for the current quarter that we're in or comment on the pipeline that you are currently seeing in your business?

Charles M. Osborne - Vice President and Chief Financial Officer

TonyI would say the cutoffs on, in both quarters were pretty clean. I wouldn't attribute this volatility to anything significance, sort of slipping between one period. And then I think the pipeline remains strong. Our people are taking EDM message into new areas of our customers and I think as we commented in the past it tends to be a little longer sale cycle but the cutoff between period seems appropriate here.

Tony Wible - Smith Barney Citigroup

And can you give us an update on Falcon? I think last quarter you had indicated that there were some issues with the initial rollout. Have those been mostly resolved at this point?

Mark N. Greene - Chief Executive Officer

There are two phase process. The first phase in consultation with the clients are effective and there is roughly 6 to 10 in this category, is to put a series of patches in place to ensure that they properly function through the upcoming holiday season as well as in winter. And that, that is largely in place as we sit here today given that those clients will be soon entering the lockdown period where they don't make changes in the systems [ph]. The more strategic fix, the re-architecturing of the product if you will is on track for delivering the first quarter of next year, first calendar quarter of next year as previously discussed.

Tony Wible - Smith Barney Citigroup

Great. One last question is as we get ready to head into the quarter for true-ups on PreScore, any qualitative comments you could provide about what's assumed in your '07 guidance that you have provided?

John D. Emerick, Jr. - Vice President and Treasurer

Tony, this is John. Can you just repeat that one more time?

Tony Wible - Smith Barney Citigroup

Yes essentially, is the PreScore product that you have typically historically, you've had a true-up in the fourth quarter either positive or negative based an the actual amount of pre-mailers that you have done. And I am just trying to get a sense if we should be modeling for scoring to...?

Mark N. Greene - Chief Executive Officer

No.

John D. Emerick, Jr. - Vice President and Treasurer

Nothing material.

Mark N. Greene - Chief Executive Officer

Nothing this year, no Tony.

Tony Wible - Smith Barney Citigroup

Okay, great. Thank you.

John D. Emerick, Jr. - Vice President and Treasurer

Thank you.

Operator

Your next question is from the line of Brett Huff [Stephens Inc].

Brett Huff - Stephens Inc.

Good evening. Wanted... I have just a couple of questions. Number one, can you tell us a little bit about the shifting of personnel back and forth between the consulting and the professional services and some of the categories. Did that cause some of the impact that we saw in the moving around the expense line?

Charles M. Osborne - Vice President and Chief Financial Officer

Well, if you are talking about that cost of personnel and the hours burned no I don't believe. So that isn't the factor. In some of our expense lines we really saw more in terms of the increase in client facing personnel, some of our marketing... sales and marketing staff and some of the efforts in the marketing programs behind the efforts to carry forward EDM message. And that's really what we would attribute some of the increase to.

Brett Huff - Stephens Inc.

Okay. And on the VantageScore just to follow up with that around the pricing pressure that you saw although it sounds like nobody has moved the pricing pressure. Can you just characterize that a little bit more? How does that conversation usually go or any other color on that?

Mark N. Greene - Chief Executive Officer

Well this is a price for value delivered discussion we have with clients. So as I noted earlier there has been secular pressure on pricings for many years, long pre-dating events working [ph]. What we need to be able to demonstrate increasing the clients these days is that there is some special sourcing [ph] in our solution. So the enhancements we made in FICO '08 which add a fair amount of protective power, I mean on the order of 5% to 15% which is a pretty big number for a mature product. That allows us to sort of rebuff some of the pricing pressure that otherwise exists. If we didn't have that kind of innovation and update to our products we would be susceptible to more commoditization pressure.

Brett Huff - Stephens Inc.

Okay. And on the partner side, at your Analyst Day you talked a lot about three or four people who are kind of nearest on the radar screen. What is the status of that? It sounds like in China you are doing some of that. Can you give us some more details?

Mark N. Greene - Chief Executive Officer

Across the partner portfolio, the name I would mention at the moment, that's for this time of the moment is IBM where we have a number of activities underway which I hope to be able to report wins as a result of... in our next call. And we are somewhat earlier stage in two or three other partnership discussions, plus the machineries in place now we'd be able to support comfortably four partnerships on a global basis.

Brett Huff - Stephens Inc.

Okay. That's all I needed. Thanks for your help.

Mark N. Greene - Chief Executive Officer

Thank you.

Operator

Your next question is from the line of Ed Maguire.

Garrett Bekker - Merrill Lynch

Hi, this is actually Garrett Bekker for Ed. Wonder if you could talk a little bit on... go back to the sales side of thing you obviously put a number of initiatives in place. Wonder if you could maybe give us an update on some of the training initiatives that you had going on this quarter, and also you are talking about headcount that you will be actively looking to increase the number of quoted reps. I wonder if you could give us an update on that.

Mark N. Greene - Chief Executive Officer

Fair enough. In terms of training two stages. The training that it is essentially complete and was rolled out over the last quarter is on sales pipeline management process that we are using, the Miller Heiman process so that we have a very consistent way in our tracking opportunities, progressing opportunities through our pipeline and understanding when an opportunity is ready to be closed. So we have a fairly formal management system in place now that our entire sales team has been trained on.

The second round of training will occur in our October kick-off meetings where we have sales rallies that will deepen training both around industry knowledge so that our teams really understand what a bank or telco or healthcare cares about as well as further training in our products. So the combination of the three types of training, the one that we have already done on how to sell, the second one that we're going to do in October on what our customers care about, and the third one on what our products can do for those customers. That should get us to where we want to be by this fall.

In terms of the hiring of additional sales personnel, there are some areas where we are still a bit thin about same in our coverage. We feel pretty good these days about the support that we now have for our largest North American clients but we remain a bit thin in parts of Asia and in Europe and the bulk of the new hires are going into those regions.

Garrett Bekker - Merrill Lynch

Okay and will those new hires largely be incremental to your existing headcount or any of that replacing any turnover you may have seen during the transition?

Charles M. Osborne - Vice President and Chief Financial Officer

There is some replacement I have but the bulk of that intended to be net new and quarter based. So the competitions systems use heavily towards the results and performance.

Garrett Bekker - Merrill Lynch

Okay any change in Mike gave us an ideas of in terms of numbers perhaps?

Charles M. Osborne - Vice President and Chief Financial Officer

30 additional client basing [multiple speakers].

Mark N. Greene - Chief Executive Officer

That's right.

Garrett Bekker - Merrill Lynch

30, great, thanks.

Mark N. Greene - Chief Executive Officer

Thank you.

Operator

Your final question is from the line of Fred Searby.

Frederick Searby - JP Morgan

Good afternoon. It's actually Fred Searby, JP Morgan, thanks. You've kind of touched upon this. But my question was with the launch of FICO 2008 the new score, is that somehow attributable or having an impact upon this?

Mark N. Greene - Chief Executive Officer

Line was just cut out. Operator you're still with us.

Operator

Yes, I am still here Mr. Searby. [Operator Instructions].

Mark N. Greene - Chief Executive Officer

Looks like we lost him.

John D. Emerick, Jr. - Vice President and Treasurer

Operator, any other calls on the queue?

Operator

No, there are no other calls in the queue.

Mark N. Greene - Chief Executive Officer

Okay.

John D. Emerick, Jr. - Vice President and Treasurer

It's okay operator, I think, we are all done. So at this point --

Operator

I am sorry Mr. Greene, Mr. Searby is back in the queue. I am going to reopen his line right now.

Mark N. Greene - Chief Executive Officer

Fred we lost you mid way through. Please repeat.

Frederick Searby - JP Morgan

Okay, I am sorry about that. Houston we had a little problem, but that's alright. Can you guys hear me now?

Mark N. Greene - Chief Executive Officer

Yes.

Charles M. Osborne - Vice President and Chief Financial Officer

Yes, go ahead.

Frederick Searby - JP Morgan

Okay, you've touched upon this, but I am just curious this is a great number, the Scoring side, up a percent. And I am just curious as to FICO 2008, the launch of the new FICO score has... did that drive have any impact or is that something that really was just purely result of volumes picking up independent of the new score?

Mark N. Greene - Chief Executive Officer

Yes and no. So the FICO product in your shipping [ph] and it ships beginning in September. So it could not have had actual impact last quarter. What it does do though is reassure clients that we remain committed to an innovation pattern. So, to extent that we had clients needing to re-up last quarter, the confidence that they saw that we are rolling out new capabilities that they value caused them to resign with us. But mathematically, what drove last quarter was really the increase in volumes. I am not sure if that's a clear answer.

Frederick Searby - JP Morgan

That's exactly what I want, thanks a lot.

Mark N. Greene - Chief Executive Officer

Thank you.

John D. Emerick, Jr. - Vice President and Treasurer

Okay operator, I think if there are any other calls.

Operator

I guess there are no further questions at this time.

Mark N. Greene - Chief Executive Officer

Thank you very much.

Charles M. Osborne - Vice President and Chief Financial Officer

Hey, thank you very much everyone.

Operator

And this concludes today's Fair Isaac's quarter three earnings release conference call. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Fair Isaac F3Q07 (Qtr End 6/30/07) Earnings Call Transcript
This Transcript
All Transcripts