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Fair Isaac Corp. (FIC)

F4Q07 Earnings Call

October 30, 2007, 5:00 PM ET

Executives

John D. Emerick, Jr. - VP, Corporate Development and Treasurer

Dr. Mark N. Greene - CEO

Charles M. Osborne - EVP and CFO

Analysts

Mark Bacurin - Robert W. Baird

Fred Searby - JP Morgan

Michael Nemeroff - Wedbush Morgan Securities

Tony Wible - Citigroup Global Markets

Kevane Wong - JMP Securities

Presentation

Operator

Good afternoon, my name is Lamont, I will be your conference operator today. At this time, I'd like to welcome everyone to the Fair Issac Corp.'s Fourth Quarter Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' 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, Corporate Development and Treasurer

Thank you Lamont and good afternoon everyone. This is John Emerick of Fair Isaac and thank you for joining us for our fourth quarter and fiscal year end 2007 earnings conference call. We issued a press release after the market closed this afternoon. And you may access it on the Investors Relations page on our website. A replay of this call will be available on our website approximately two hours after the completion of this call, through November 27th.

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 Security Litigation Reform Act of 1995.

These statements may include statements concerning our business strategies and our intended results, as well as 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 actual results to differ materially from those expressed and/or implied by these statements. Additional information concerning these risks 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 30, 2006 and our Quarterly Report on Form 10-Q for the period ended June 30, 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 Presentations page, found within the Investor Relations portion of our 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'll open the call for questions. Now, I'll turn the call over to Mark.

Dr. Mark N. Greene - Chief Executive Officer

Thanks John, and thank you all for joining. First I would like to begin by extending our deepest sympathies to the citizens of San Diego, as they cope with the aftermath of last week's devastating fires. Fair Isaac has many employees in that area, several of whom suffered significant losses or disruption. While our San Diego office was closed for several days, our teams worked remotely even as they attended to their personal situations. Our company is made up of resilient special people and I am grateful for their safety, the safety of their families and for their unyielding professionalism during this difficult time.

Now, on today's call I would like to review, the results for our fourth quarter and fiscal year 2007 both ending September 30, 2007. I also discuss our progress in the areas of client focus, sales effectiveness and strategic growth. Then Chuck will provide further details on our recent financial performance, as well as our guidance for first quarter fiscal 2008 and the full year fiscal 2008.

This quarter, we reported fully diluted earnings per share of $0.52 versus the $0.40 we guided last quarter and the $0.35 we reported in the same period last year. We've reported revenue of $207 million and net income of $28 million. Finally, we had a solid quarter from a bookings perspective, with $95 million of aggregate bookings, including 22 deals of over $1 million in value and 5 deals of over $3 million in value. Our revenue yield from this quarter's bookings of 26% and a weighted average life of 1.8 years for all executed bookings contracts.

In summary, our as-reported revenue increased 1% over the prior quarter and is essentially flat in comparison to the same period last year. Adjusted for the March 2007 sale of our mortgage product line, which had previously contributed between $4 and $5 million per quarter, we experienced 2% revenue increase over the same period last year.

Our GAAP earnings per share of $0.52 per fully diluted share was a 24% increase over the prior quarter and a 49% increase from the same period of the prior fiscal year. Chuck will address the reported results and the one-time items impacting these results in a moment.

Our results for the fourth quarter, were better than we expected and reflect modest growth. These results encourage me to believe that, we now laid a solid foundation to begin expanding our business in fiscal 2008 as we seek to achieve market rates of growth in fiscal 2009.

To give you some further color to the quarter, let me first take you on some recent operational, strategic and technology-related initiatives and then discuss how these initiatives are improving our performance in the marketplace to several client wins that show increasing traction for our enterprise decision management vision.

First with respect to our operating team, this continues to drive process improvements and resource allocations to ensure that we remain responsive to the marketplace. The team is recently focused on acting on the insights gained from our first ever formal clients satisfaction survey, in which more than 70 clients benchmark our performance to that of our peer competitors. Let me highlights three findings.

First clients have shared with us their perspective on our sales process and sales follow through, and as a result we have adopted and are now rolling out a best-in-class, formal sales pipeline management methodology. The tenants of this plan are as follows. Ensuring that our sales teams understand their clients business deeply, ensuring that we have a consistent go-to-market approach, and compensating sellers in a way that motivates them to help clients realize full value from our EDM or Enterprise Decision Management solutions set. We have made great strides in each of these areas.

Second clients have told us they want to better understand our product roadmaps and upgrade plants. We've instituted a product release communication program that keeps client abreast of our product directions.

Third, they have told us that they want us to simplify our product portfolio, to make it easier to understand and to ensure that we are investing in a most important product areas.

So, we have now narrowed our industry... now that we have narrowed our focus to four key industries, financial services, insurance, retail, and life sciences; we are similarly prioritizing our product line up with efforts underway to consolidate our current portfolio of 117 products to fewer than 50 offerings without appreciable revenue leakage. We believe that this simplification will allow us to run the business more efficiently going forward.

Our strategy team in second unit continues to review our business in order to optimize our investments and prioritize our growth initiatives. The core of our strategy remains enterprise decision management or EDM which is helping clients to make smarter decisions across their organizations. Increasingly, we find that the EDM concept resonates strongly with clients, especially as they understand it to be the next generation of business intelligence, a capability that is now mainstream. In essence, while business intelligence systems provides powerful insight into past behaviors and transactions, EDM users predict the analytics to suggest optimal strategies for the future. We continue to focus our EDM playbook on those areas which are about strong growth segments and places where we have core competencies. Our EDM playbook will put this company on a roadmap in fiscal 2008 towards our goal of achieving industry rates of growth of 7% to 10% in fiscal 2009.

The first element of our go-forward EDM playbook is improve focus on Fair Isaac's core franchise of financial services clients, especially in North America. While we're well-represented in this customer set, we have light product penetration with most of these clients. So, we are now very focused on cross-selling opportunities, that is, selling additional products to existing clients, helped by the increasing integration of cross-offerings as our EDM products set rolls out.

Second, we have a sharpened view of our opportunities internationally. Eight countries comprise roughly 50% of our international opportunity. So while we just historically spread our efforts across roughly 30 countries, we will now narrow that focus to the eight international markets that really matter and begin to prioritize our headcount in those markets.

Third on our strategy team; with the arrival of our new Chief Marketing Officer, Tracey Stout, we now have the right team in place to work on improving our EDM-value proposition. We continue to see a sweet spot for our company and a connected set of analytical offerings that's been a lifecycle ranging from marketing through originations, account management, collections, recoveries and fraud management. So, our marketing team will sharpen this EDM message and move to raise our brand profile in this space.

Finally, as part of our ongoing strategy work, we've now determined that our marketing services unit is strategically coherent with this EDM vision as it is the first element in the customer lifecycle. Moreover, the marketing service business which we were evaluating strategic alternatives for continues to experience improving financial performance. And there is considerable upside potential as analyst report that spending on marketing services is growing at 5% to 10% overall, with a 16% growth rate in the analytic sub-segment where we're focused with offerings such as our best next action solutions.

So thanks to that offering and related capabilities such as precision view, the marketing services business is quickly becoming a high value-add component of the customer lifecycle, especially in verticals such as retail and other parts of the financial services. As a result, we've withdrawn the proposed sale of this unit and we're recommitted to managing marketing services business as an integral part of our EDM strategy, as well as investing to realize the full potential of this business.

Now our technology team has been focused on two areas over the past quarter, the rollout of our EDM products and new product innovation. Concerning EDM, the team continues on course with the architectural blueprints and product development activities needed to achieve the three year EDM roadmap that we delivered last spring. And concerning new product innovation, we completed review of over 50 new product ideas and selected the seven most promising ideas to fund and bring to market. These seven initiatives now have innovation champions appointed and assigned to drive the offerings to our research and development teams into commercialization inside of 12 months, so that we can continue to grow our company share of new product revenue.

Let me know tell you how these transformation initiatives are improving our ability to meet our primary objective of focusing on our clients. As I noted, earlier we invest considerable effort in ensuring that Fair Isaac listens to client needs and responds with the appropriate products, services and support. In the fourth quarter this included hiring new sales leaders for our business in Japan and Latin America, and adding roughly 40 more sales and service personnel during the quarter. In addition to some 100 sales and service personnel previously added earlier in the fiscal year.

We've also introduced a new disciplined sales pipeline management process, and education for our client-facing teams on our Enterprise Decision Management strategy and portfolio. These efforts are beginning to take hold, as evidenced by three EDM client wins achieved earlier in the quarter. First, for a leading global computer systems provider, Fair Isaac increased its EDM technology footprint to a $3 million enterprise license extension of our Blaze Rules engine. This client had originally implemented Blaze to improve precision in its credit pricing decisions, enabling them create a continuous pricing system based on risk and opportunity. With our expanded relationship they are now using Blaze to build corporate-wide decision management framework. One example, of this targeted approach, the client will use Blaze to efficiently resolve customer service cost, dramatically improving customer satisfaction while significant reducing their operating costs. Over the next two years, we anticipate many such large scale implementations across this client, as we work in partnership to help them realize the EDM vision.

Second, customer win from last quarter in financial services, a major European banking group chose a partner with us to develop their Basel II compliance program, using Fair Isaac's Model Builder software and expert consultancy to develop risk models needed to satisfy the UK's financial services authority. This banking group is aiming for advanced internal rating status which means that they must prove that they can model risk and simulate economic scenarios across their entire credit portfolio; truly an enterprise decision management challenge. The benefit to the client here is enormous. Once the bank obtains their advanced status, they are qualified for greatly reduced required capital reserves, freeing up capital for other more profitable users. Thus this is a Board-level project for the client, which having previously purchased our debt manager Falcon and TRIAD products truly using the Vanguard using Fair Isaac's EDM technology across an enterprise.

In the third example from the quarter, we were pleased that we were awarded multiple engagements with the de novo Auto Finance Entity to deliver custom analytics and business consulting services. This included a company-wide license for Blaze worth $3 million. This client is using Blaze to create sophisticated loan underwriting and pricing decisions and then will extend it to use overtime to their collections and funding areas.

And each of these three design wins illustrates an enterprise-wide deployment of multiple Fair Isaac solutions, signaling strong corporate acceptance of our EDM value proposition. And we are seeing similar success in our direct-to-consumer unit. myFICO.com, which sells credit scores and financial advise to consumers, saw 18% year-over-year growth last quarter. And we are pleased that the November addition of Kiplinger's Personal Finance included myFICO.com amongst its best of 2007 websites, and awarded myFICO top honors in the category labeled 'Best Place To Get Your Credit Score'.

Let me turn now to our scoring business. With the recent mortgage market turbulence, many questions have arisen concerning the impact on Fair Isaac. While we are not in a position to comment on the many complexities of the mortgage situation, what we can tell you is that all mortgage-related activity only represents between 5% and 10% of our scoring revenue. In addition, we believe the focus on the subprime situation may have actually driven more volume for our scores.

Indeed the business division portion of our scoring business continues to experience high volumes in the past quarter. We believe the strength is due to the versatility of our credit score coupled with its use over the credit lifecycle. However, we must exercise caution in forecasting this business as we enter fiscal 2008. The guidance we've issued for the fiscal 2008, assumes modest erosion in our scoring business with a potential for further downside risk if pricing pressures accelerate. This stems principally from increasing competition, which we're already experiencing with our pre-screen products and which may experience in other parts of the credit lifecycle. Faced with this increasingly challenging environment, we see to distinguish ourselves from the competition through continuous innovation. We've upgraded our FICO scoring model with the release of the FICO 2008 score, FICO '08 to capture and incorporate new information and practices.

Our clients are embracing the FICO '08 release, and we are now working with our bureau partners for delivery of this product. In addition, we continue to explore our new markets with our global FICO score, as represented by a recent rollout announcements in Spain and Brazil.

So in summary, we've made significant progress towards the goals that we established when I joined this company in February. A world-class executive team is now in place. Our EDM strategy has been perfected for the coming fiscal year and suite of operational improvements is underway. Our client teams now have the compelling story and a strong product portfolio to share with clients. They are engaging using a consisting go-to- approach and clients are acting well both to the new Fair Isaac and to our EDM vision. As you will hear shortly from Chuck, with this momentum and a solid foundation in place, we are guiding to 3% revenue growth forecast for fiscal 2008, on our way towards market rates of growth of 7% to 10% in fiscal 2009.

With the respect to EPS, we are guiding to $2 per diluted share for this fiscal year, or 10% above the GAAP EPS reported for fiscal 2007. While our 2008 plan does have some downside revenue risk in scoring we also have upside potential in several areas; Improved goodwill as we boost client satisfaction, accelerated new product innovation, strengthening market demand for big ticket EDM suites, international demand growing at double-digit rates and significant cross-sell opportunities among North American financial institutions.

We remained focused on controlling our expenses and are confident we can achieve our targeted EPS growth to these initiatives and through continue share repurchases. So as we execute on our plan in fiscal 2008, I believe Fair Isaac is well positioned for successful revenue expansion on top of an optimal expense structure relative to both organic growth and opportunistic acquisitions.

Let me now turn the call over to Chuck to provide you with further details on this quarter's financial results. Chuck?

Charles M. Osborne - Executive Vice President and Chief Financial Officer

Thank you, Mark and good afternoon everyone. First I would like to echo Mark's sentiments about all of our loyal and hardworking employees especially those in Southern California. And that's got all of them during this difficult and trying time. In addition I would like to thank our entire finance team both those in San Diego and those here in the Minneapolis, all of whom came together to ensure we had no difficulty in delivering this earnings release.

To all of you a big thank you. This afternoon I will be providing a summary of our fourth quarter and year-end financial results including some additional details concerning this quarter's results, and then conclude with our guidance for both the first quarter and the full fiscal year 2008. As we stated in our release this afternoon, our revenue for the fourth quarter of 2007 was $207 million, 1% increase from prior quarter, essentially flat from the same period last year's and above the $200 million guidance we provided on our last earnings call.

For fiscal 2007 revenue was $822 million essentially flat to our revenue in 2006 of $825 million. However, as Mark already noted, normalizing our results for the sale of our mortgage product line, in March, these results would reflect slightly stronger growth rates than I stated above.

The net income for the quarter was $28 million, a $4.5 million or 19% increase over last quarter and a $6.2 million or 28% increase from the same period last year. Net income for fiscal 2007 was $105 million, a 1% increase from fiscal 2006 of $103 million. As it relates to our net income, I would like to mention that this quarter, our results were impacted by $1.6 million of after-tax one-time related charges for a variety of expense reduction initiatives. These included the closing of two underutilized offices, both Baltimore and Emeryville, and a small reduction in headcount related to some organizational changes. In addition, this quarter's results were impacted by both $3.8 million of after-tax costs associated with the resolution of the customer law suite in an insurance solutions product line, and a tax adjustment based on the conclusion of a federal tax audit for the years 1998 through 2001.

We reported fully diluted GAAP, EPS for the fourth quarter of $0.52, a 24% increase from last quarter and a 49% increase from the same period last year as well as higher than our guidance of $0.40 per fully diluted share. Our GAAP, EPS for fiscal 2007 was $1.82, a 14% increase from the fiscal 2006 GAAP EPS of $1.59 per fully diluted share and higher than our guidance of $1.71 for the year. The bookings for the fourth quarter were $95 million from which we generated $25 million of current period revenue as compared to bookings of $113 million in the same period last year, a 16% decrease. This quarter's bookings were above the guidance we provided of $75 million to $80 million with $15 million to $20 million in current period revenue.

Now, let me walk you some of the more specific financial details. For segments, our revenue contribution by market segment is as follows; scoring contributed $46 million or 22% of the total revenue for the quarter and $180 million or 22% for the full fiscal year.

Scoring revenue for the quarter reflects a 1% increase year-over-year, while the revenue for the full year represented 2% increase over fiscal 2006. This performance reflects higher volumes, with the credit bureaus and include some pricing compression with our PreScore products.

Strategy machines contributed $106 million or above 51% of total revenue for the quarter, as compared to $111 million or 53% in the prior-year period. The strategy machine revenue represents a 4% decrease, or when adjusted for the sales of mortgage assets was flat. Performance was driven by strength in collections and recovery, and myFICO.com, with slight declines in TRIAD and our insurance solutions products. Fiscal year revenue for the segment was $439 million or 53% as compared to $453 million or 55% in the prior year, a 3% decrease well or 1% increase when adjusted for the sale of mortgage assets.

Analytic software tools totaled about $18 million or 9% of the total revenue for the quarter and as compared to $13 million or 6% of the revenue in the same quarter of last year. The 34% year-over-year increase was due to an increase in revenues generated from sales or the Blaze Advisor or Model Builder products.

Professional Services segment of our business contributed $38 million or about 18% of total revenue for the quarter, and for the same quarter of the prior year. This similar performance is primarily due to an increase associated with customer management and industry consulting, offset by a decline in revenues derived from collections and recovery, fraud application implementation and lower EDM app implementation.

Fiscal 2007 revenues increased to $151 million or an 18% share of total revenues as compared to $149 million in the prior year. Looking at our vertical markets, the percentage of this quarter revenue by vertical was as follows. The financial services vertical of 66%, insurance vertical at 8%, telecom was 4%, retail was 8% and all other verticals which consists of government, myFICO.com, consumer branded goods and other miscellaneous categories were 14%.

The company's transactional or recurring revenue for the quarter represented approximately 73% of our total revenues against 75% reported in the same quarter in the previous year. The percentage of consulting and implementation revenue is held constant at 18% of our total revenues this quarter, one time our license revenue was 9% of our total revenue, higher than the 7% reported both last quarter and in the same quarter a year ago.

Our international base decreased slightly from last quarter to this quarter with approximately 30% of our total revenue base coming from outside the United States. This is a slight increase from the 29% that international revenue represented in the same quarter of last year. Recent strength has continued to come from EMEA and Latin America.

Looking at expenses, the breakdown of our operating expense is shown as a percentage of revenue during the quarter and for the full fiscal year was as follows. Cost of revenues for the fourth quarter and for fiscal 2007 was approximately 36% as compared to 34% in the same quarter last year and fiscal 2006, This resulted from higher personnel costs plus an increase in direct costs associated with a greater mix of revenue from products that require data acquisition, such as myFICO and marketing services.

Our research and development costs were 9% for the fourth quarter, for fiscal 2007 and for the same quarter last year compared to 10% for all of fiscal 2006. These is the result from a continued shift of certain personnel to lower cost regions such as India.

Finally selling general and administrative expenses costs for the fourth quarter were approximately 37% and 35% for fiscal 2007, as compared to 32% for the same quarter last year and fiscal 2006. Increase was related to compensation costs associated with additional client-facing personnel, amounts related to commission and incentive plans, and increase of cost associated with both the settlement of a law suit relating to our insurance solutions product line and the continuation of the VantageScore litigation.

Looking at operating income, our total operating income for the fourth quarter was $31 million, compared to $32 million in the fourth quarter of last year, a 2% decrease. The pro forma operating income was $38 million before amortization of intangible assets of $4.5 million and charges for office closures and organizational restructuring of $2.5 million. The amortization expense declined by $1.6 million this quarter as certain intangible assets related to the HNC acquisition reached the end of their accounting life. The amortization expense will continue to decline by roughly another $1 million next quarter, as those same intangible asset accounts have no remaining balance to amortize.

Lastly, this quarter benefited from lower expense related to SFAS-123 stock option expense, result of certain plan changes and the small reduction in headcount. Reported operating income equates to pro forma operating margin of 18%, a significant decrease from the 25% reported in the same quarter last year, excluding the restructuring cost in fiscal 2006. This decline is mainly due to the settlement of the previously mentioned law suit, the increase in legal fees relating to the VantageScore litigation and an increase in commission expenses at certainly accelerators where achieved in the quarter.

Total operating income for fiscal 2007 was $148 million, with pro forma operating income of $173 million. This pro forma operating income represented a margin of 21% for all of 2007. We remain committed to our goal of increasing the pro forma operating margin to 30%. Again, net income as I have already mentioned, net income for the fourth quarter was $28 million, a 28% increase from the $22 million reported in the same period last year. The net income for fiscal 2007 was $105 million, as compared to $104 million for fiscal 2006. Net income for fiscal 2007 was affected by adjustments made during the year and at a discreet tax expense from the sale of our mortgage product lines. Excluding these items, our effective tax rate for the year was approximately 36%.

Turning to our balance sheet, our cash in investments as of September 30, 2007 decreased by $21 million to $247 million, as compared to $268 million as of September 30, 2006. The primary contributors to the change in cash and cash equivalent includes the receipt of cash provided by operations of $179 million, as well as $84 million received from the exercise of stock options and stock issued under employees stock purchase plan. Significant uses of cash during the year-to-date period, included $451 million used in our stocks buyback activity and $23 million related to purchases of property and equipment.

Finally, I want to highlight our free cash flow for the trailing 12 months. We define free cash flow as cash flow from operations less capital expenditures and dividends paid. The free cash flow for this trailing 12 months is currently $152 million against the $163 million of trailing 12 months free cash flow as of the end of fiscal 2006. This decline is mainly attributed to our lower level of cash flow from operations, results of an increased use of cash, working capital and in financing our share repurchase activities. Improvements in our receivable collection process, as well as the potential refinancing of our convertible debenture could have a further impact on our free cash flow.

Net account receivable as of September 30th, totaled $177 million, a $12 million, or 7% increase over the September 30, 2006 balance. Our latest balance was a small decline from the June 30, balance of $179 million. Our DSO, or days sales outstanding was approximately 79 days for both this quarter and last quarter, against the 74 days reported at the end of fiscal 2006. While, we continued to improve our collection process due to more attention from clients relationship channels, we still attribute a portion of our high DSO to longer payment terms on certain contracts with 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 $52 million compared to the $57 million reported as of September 30, 2006. This is the result of the net impact from the $27 million of depreciation expense recorded this fiscal year, offset by $23 million of capital expenditures during the year. Again at capital structure, we increase the amount outstanding under our revolving credit facility by $100 million this quarter. The proceeds were used mainly for the large amount of share repurchases we made this quarter, but also for the small amount of our convertible debentures that were put back to the company earlier in the quarter.

We were able to be aggressive this quarter in the open market, and repurchased a total of $4.5 million shares at an approximate cost of $169 million representing roughly 8% 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 September 30, 2007, we still have $49 million remaining under this authorization. We've planned to seek a new authorization to the Board at their meeting this November. The company continues to believe that repurchase of our stock as an attractive use of our cash.

Looking at our staffing levels; our total headcount at the end of the quarter was 2,824 compared with the 2,760 reported at the end of last quarter and 2,737 reported on September 20, 2006. This includes approximately 846 client-facing positions versus the 705 clients-facing position we employed as of the year earlier period, which include ICM position product sales and product pre-sales position, client support staff and the professional services position.

Turning now to guidance. Our guidance for the first quarter of fiscal 2008 is $205 million for revenue and $0.45 in GAAP earnings per diluted share. Further, our full year revenue guidance for fiscal 2008 is $850 million. From this guidance, we expect GAAP earnings per diluted share of $2 for the full year of fiscal 2008. The GAAP EPS guidance stated does not include the potential impact from the possible refinancing of the contingent convertible, which can put or called in August 2008. For modeling purposes, we've assumed a 36% effective tax rate for fiscal 2008 and we expect open market share repurchase activity will continue at the pace of about 1 million shares per quarter.

As for bookings, we expect in the full year fiscal 2008, bookings will be approximately $380 million, with $170 million of revenues from these bookings needed to deliver our guided revenue of $850 million for the year. In the first quarter, we will need to deliver 20 million of revenue from new bookings of $95 million, in order to deliver our guided revenue of $205 million.

Now that concludes my prepared remarks and I will turn the call back over to Mark, before we open up for your questions. Thank you.

Dr. Mark N. Greene - Chief Executive Officer

Thank you Chuck. Our overall goal and priority remains to earn the right to be our clients-trusted deviser, while delivering solutions that helps them make smarter business decisions. We are confident to know how to achieve this goal, and deliver value to our shareholders by executing on our growth strategy and achieving organic growth of at least 3% in coming fiscal year. I'd like to thank each and everyone of our employees who have committed so much to the success of this company. The contributions made this quarter the success that it was and that continues to further make our future bright. On this note, I believe that we are well positioned for fiscal 2008.

One final note. We will not be hosting an Analyst Day this November, as we have in years past, as our management team is heading shortly to Asia-Pacific region for Users Conference. Therefore, we look to spend the incremental time with investors to one-on-one meeting and to sales side conferences. Operator, we may now begin question-and-answer period. Thank you.

Question And Answer

Operator

[Operator Instructions]. And your first question comes from the line of Mark Bacurin.

Mark Bacurin - Robert W. Baird

Hi good afternoon. A couple of questions. On the Blaze Advisor in Model Builder sales, obviously pretty strong this quarter. Can you talk about specific demand drivers and whether or not that's being driven off of some of the early EDM successes?

Dr. Mark N. Greene - Chief Executive Officer

It actually sort of bodes well for the EDM success. What happens, especially in the newer markets and new geographies, is customers first get to know our companies through Blaze. They start with that middleware. It provides the foundation. If the infrastructure that allows us, we then go back and sell our EDM applications on top. So we have seen particular growth of the Blaze products in markets such as China and India, and in some of our newer entering industries, such as healthcare and insurance.

Mark Bacurin - Robert W. Baird

Great and then Chuck, I thought I heard you talk about some declining professional services revenue related to some EDM projects, and then, but you also talked about staffing up the professional services staff. It sounds like very recently. So just trying to understand is there a big wave of professional services activity coming as we move into fiscal '08, that you are staffing up ahead of or just trying to understand those two comments at they seem to be a little contradictory?

Charles M. Osborne - Executive Vice President and Chief Financial Officer

Yes, they do seem to conflict, and part of the issue of course is the EDM sales will be led by our license sale. And then we will follow with a professional services implementation. So the sale and the acceptance of the software precedes the... actually a lot of work specking it out to precede the actual implementation. So, we expect that we will follow with the use of professional services for personnel.

Mark Bacurin - Robert W. Baird

So in another words, the strong analytic and model builders sold this quarter probably, it's for shadowing, improving professional services revenue and that's the reason for staffing up this quarter?

Charles M. Osborne - Executive Vice President and Chief Financial Officer

Correct that would precede the run up for PS.

Mark Bacurin - Robert W. Baird

Great, and then just wanted to get an update that I hear and I want to know of kind of ongoing efforts to build sales distribution through systems integrators such as IBM in that. That's one of your key strategic priorities?

Dr. Mark N. Greene - Chief Executive Officer

Yes, we are making good headway there. We don't yet have big joint wins to announce publicly. We are very well engaged particularly with IBM in many countries around the world now, so I am quite optimistic, as we look at that pipeline, and you will be hearing I think about that in future. And we now have a team focusing on two or three other similar lines, not just IBM. So I think the foundation is in place, the pipelines are building. You should be seeing results in the near future.

Mark Bacurin - Robert W. Baird

Okay and then just finally, insurance solutions. I know you talked about them several quarter as being a drag. Can you just share with us what is sort of left there, that maybe at risk and when the comps start to get a little bit easier from some of the turn you are seeing there?

Charles M. Osborne - Executive Vice President and Chief Financial Officer

Well we think, we have insurance solutions sold both on the analytic side and then the insurance overview businesses there and as I think we will discussed it, while we will continue to evaluate peer review for strategic alternatives. But we are very... frankly we are very optimistic about some of the solutions we bring on the analytics side.

Mark Bacurin - Robert W. Baird

Can you... is it easy that involve strip out what the reviews was in the quarter and kind what the comparison will be in Q1 '08?

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

This is John. So during the quarter peer review was down a little bit as a contract fell of, but we've also had some wins and so we expected that revenue actually can go up. It's not a one way declining prospect. There is actually a number of deals that were signed in prior quarters, but that revenue will start to pick up. So you are kind of in a valley and I would expect to see that Q1 kind of picks up a little bit and this quarter was just down from a couple of prior deals that fell off?

Mark Bacurin - Robert W. Baird

Okay, perfect. Thank you.

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

Yes, thanks Mark.

Operator

Your next question comes from the line of Thomas Ernst.

Unidentified Analyst

Hi, this is Nandan Ambladi [ph] on behalf of Thomas Ernst from Deutsche Bank. Couple of questions; one is, on the exposure to your financial services. You said 66% of your segment I mean your vertical revenue comes from financial sector. But on the market side you said only 5% to 10% of the revenue is exposed to the mortgage market. What are the other sectors that you are serving and are you seeing any impact there?

Charles M. Osborne - Executive Vice President and Chief Financial Officer

Its larger to credit card sector and other portions of retail banking, some DDA and credit and debit applications, but principally credit.

Unidentified Analyst

Okay and you are not seeing much impact there?

Charles M. Osborne - Executive Vice President and Chief Financial Officer

That's correct.

Unidentified Analyst

Okay.

Charles M. Osborne - Executive Vice President and Chief Financial Officer

I am sorry, not impacting those segments from the mortgage issues.

Dr. Mark N. Greene - Chief Executive Officer

Of a negative nature.

Unidentified Analyst

Right. Okay. Then on the other question, clearly your new marketing activities seem to have helped be at a uniform marketing message and so on, but as you expand globally what do you see that's left to do so that you've good head of scene going into 2008?

Charles M. Osborne - Executive Vice President and Chief Financial Officer

Thank you for the compliment on marketing. I think we know, what we want to do there. I think we are still in the very early stages of doing it. So, establishing a consistent brand profile, raising our image, declining value proposition, taking segment leadership and thought leadership and so on, that's all in front of us yet. We now have the team on board to do that and I think we got a good clients for doing it, but we're not there yet.

Unidentified Analyst

Okay. Of the eight countries that you believe account for about half your international segments, would you be willing to name any of the countries that you're focused on?

Charles M. Osborne - Executive Vice President and Chief Financial Officer

Yes, a couple of them will not surprise you. The places where we're probably, like relative to the opportunity include Australia, Germany and Japan. So, those three come to mind as places where we're already present, but we could strengthen our capabilities. China is also on the list for different reasons. But that's been previously covered, that's enough.

Unidentified Analyst

Right. Okay, thank you.

Dr. Mark N. Greene - Chief Executive Officer

Thanks.

Operator

Your next question comes from the line of Fredrick Searby.

Fred Searby - JP Morgan

Yes. Thank you. Couple of questions; one, I wondered, if you could talk about, what you said TRIAD was slightly down. I was just wondering if you could talk about, what your expectation is in the launch of the new product and what you see there? And then secondly, just free cash flow if you can help us, should that move in line? I think you are guiding for 10% earnings growth for that track, the earnings growth in your '08... fiscal '08 guidance?

Dr. Mark N. Greene - Chief Executive Officer

With respect to TRIAD portion, I will take that one. This is normal sort of product transition. We're rolling out in the coming months TRIAD 9, which has gotten a lot of strong receptions from customers, who had an early look. So, you should expect improvement in that line item in the next quarter or two, as that product seems to develop traction in the marketplace. So, nothing unusual going on there and we're well on track with the next product release that should improve the fortunes of TRIAD.

Charles M. Osborne - Executive Vice President and Chief Financial Officer

On the free cash flow, we should expect that to move in line with net income, the other factors that add back to that, obviously we have...we will see some impact on income upward, because of our reduced amortization. But the sum of the two will come up with the same numbers. So, we should see those grow with net income. Our CapEx will be in line with last year and I wouldn't predict any changes in dividend at this point.

Fred Searby - JP Morgan

And one quick follow-up just if you can remind me the bookings number is not of a good year-on-year. If we look at that and what is the change again that explains it's down year-on-year, but you've in the past highlighted that there is a change in the way?

Charles M. Osborne - Executive Vice President and Chief Financial Officer

Yes, Mark highlighted this needs to talk in terms of the average life contracts. The bookings value is the sum of the bookings value of items taken during the quarter and has contracts have shortened both in Fair Isaac and across the industry, the absolute value in terms of total value of the bookings, in any, in the quarter is less, but it doesn't necessarily predict that revenue achieved from that in following periods will be lower, it simply argues perhaps renewals will come quicker.

Dr. Mark N. Greene - Chief Executive Officer

That said, we did see two quarters in a row now of improving in bookings. So, the trend is favorable. But Chuck is correct. The overall macro factor that's affecting the entire tech industry is that customers tend to be buying shorter amounts of contracts at times.

Charles M. Osborne - Executive Vice President and Chief Financial Officer

And your question really goes to the fact that the bookings this quarter is still lower than the year ago.

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

Fred,this is John, I want to just clarify, it sounded like. We never alluded to the fact, that there is a change in anyway that we do anything with bookings. That was something that an analyst wrote about. But we do not... we don't agree with that interpretation.

Dr. Mark N. Greene - Chief Executive Officer

We measured on the same. But we are observing an industry-wide phenomenon.

Fred Searby - JP Morgan

Okay. Thank you, gentlemen.

Operator

Your next question comes from the line of Michael Nemeroff.

Michael Nemeroff - Wedbush Morgan Securities

Hi, good afternoon. Couple of questions. First and foremost, there has been a lot of talk about financial services spending, enterprise spending. And the fact that it is slowing or some companies are being cautious, given the pie to the financial services vertical. Are you seeing anything out there, Mark that would give you a pause about the pipeline or anything related to activity going into the budgeting for next year?

Dr. Mark N. Greene - Chief Executive Officer

Thanks for the question. Actually no, the space that we operate in tends to be sort of high value and if you will, almost a mission critical space. So, this will be actually an area, where many of our clients doubled down if they have worries about, where they can afford to spend on technology. So, we are not seeing the kind of weakness in pipelines and market conditions that you heard other tech companies refer to.

Michael Nemeroff - Wedbush Morgan Securities

Okay. Then on the scoring business, you alluded to an erosion of that business in fiscal 2008. Can you talk a little... what kind of a decline can we expect and also can you enlighten us on who the competition that's gaining share especially in the PreScore area?

Dr. Mark N. Greene - Chief Executive Officer

Okay. The decline that we've figured into our models is on the order of couple of percentage points. So, we are not talking dramatic numbers but there is erosion. And there is, as I indicated, potential for further pressure downwards from here. Two sorts of competition; first a fair amount of it is in-house. As the credit card industry is consolidating a number of our clients have sufficient organization capacity that takes some of this working in-house. Even when they do, I should point out, that doesn't mean a loss of all of our business. We can still sold such clients tools and frameworks to allow them to build their own scores. But it may have a depressing affect on our scoring sales.

Second, probably the most notable external competitors would be the VantageScore. And we do see that product being evaluated and tested in the marketplace.

Michael Nemeroff - Wedbush Morgan Securities

Okay. And then on the sales cycle, EDM obviously had a very strong quarter. But we have seen this in the past, where there has been some pretty strong variability in those results. Can you talk about the sales cycles, whether they are shortening for the EDM, have you guys got a better process to closing those deals. And also if you could give you a little bit of flavor of what the ASPs for the EDM deals and how that's been trending over the last couple of quarters?

Dr. Mark N. Greene - Chief Executive Officer

With respect to sales cycle, I don't see it shortening, it's still on the average of nine months plus or minus. What we are getting better at is consistency of executing against that sales cycle. We have a pretty good pipeline management discipline in place now. We have closed plans as they say in the industry, which help us bring these transactions in our pretty smooth drive path. So, we have good invisibility in the pipeline. We know, what we are doing and we are doing it better. But we are not necessarily shortening the sales cycle or making it predictable. Second part of your question...

Charles M. Osborne - Executive Vice President and Chief Financial Officer

YesI don't think, we have anything to do in hand on ASP related to EDM space around for prepared release. So....

Michael Nemeroff - Wedbush Morgan Securities

And then the last final question is related to acquisitions in the past. The company has been acquisitive. There has really been no activity from you guys since you started. Do you feel like, you are in a better shape or at to maybe rev up the acquisition program again. And how much of that is factored into your guidance?

Dr. Mark N. Greene - Chief Executive Officer

I would give sort of temperate response here. Yes, I think that the company is increasingly in better shape. And so we've a more solid foundation on top of which we could acquire. The 3% number that we have guided to assumes only organic growth. There is the opportunity for selected acquisitions on top of that and indeed we are looking at a few. So, once you think about niche acquisitions at this stage not large scale acquisitions.

Michael Nemeroff - Wedbush Morgan Securities

Thank you very much.

Dr. Mark N. Greene - Chief Executive Officer

Thank you.

Operator

Your next question comes from the line of Tony Wible.

Tony Wible - Citigroup Global Markets

Good evening. I was hoping that you could start by, describing where exactly you would see opportunity to better manage cost. I think you had mentioned in your commentary that there would continue to be cost... better cost management. I think the guidance implies nice improvements in margins. Can you talk about where exactly that would come from, outside of the intangible?

Charles M. Osborne - Executive Vice President and Chief Financial Officer

Yes, we continue to experience opportunities both in facilities, we have a pretty wide reach, consolidating some of our facilities and allowing, to be a little more efficient in the way we... our people are positioned and how particularly with some of the acquisitions, we did, we have some fairly small facilities, which with consolidation, which helped our process. We've made some strides and how we managed some of our benefits. Certainly the efficiency of our PS ranks and some of our administrative staff, we have been able to improve. We look for areas both in some of our units for cost efficiencies on the development side, using offshore. We made a reference to the R&D, in fact that R&D has come down. But it's really has been a function of putting people in India, adding to our smaller development efforts there. All of these things, kind of add up, it's a game of inches if you get right onto it, and you look for opportunities everywhere.

Tony Wible - Citigroup Global Markets

Okay. And the charges that you took for the legal charges this quarter. What was the pre-tax amount of that? There was an after-tax number that...

Charles M. Osborne - Executive Vice President and Chief Financial Officer

I think, it's used back into using about 36% rate, you will get the number on your own.

Tony Wible - Citigroup Global Markets

Great. Can you guys quantify. How big PreScore and myFICO.com are that today?

Charles M. Osborne - Executive Vice President and Chief Financial Officer

I think our PreScore revenue is just a little under $13 million in total and we are looking for... we are experiencing some pricing pressure in some of that, as both analytic staffs and even VantageScore in some cases are used to negotiate better deals.

Tony Wible - Citigroup Global Markets

Any concerns about regulatory environment changing for either of those businesses?

Dr. Mark N. Greene - Chief Executive Officer

No, if anything outside the U.S. there is somewhat favorable movement in certain countries towards regulatory climates that would favor our scoring technology. So no downward concerns here.

Tony Wible - Citigroup Global Markets

Okay and just to check, I mean we have seen the lifecycle of the bookings come down. It appears that there is a bigger tax elements driving, some of that shorter life cycle on the bookings. But is that in part, at all driven by Fair Isaac, or is there a contemplation of maybe changing the pricing from Fair Isaac from more of a transactional, to maybe a higher license and maintenance fee, over shorter period of time. Does that ever come across the Board, any idea?

Charles M. Osborne - Executive Vice President and Chief Financial Officer

Yes as a strategy, as a tactic I think we'll look for whatever terms, especially in contracts that will allow us to partner longer with the financial institutions. So we will look for the ways to provide professional services on an ongoing basis, to help them with their modeling, to have follow-on product sales that will allow us. If that means we have to carve a contract up into more elements with multiple licenses, we will do things like that. Some of those things will appear as though the bookings are smaller in the near term. But it gives us an opportunity, throughout this we try to keep our client-facing people in front of the customer at all times with renewals and other opportunities for new products.

Tony Wible - Citigroup Global Markets

I guess, is it fair to say looking at the '08 commentary that you are generally expecting your bookings lifecycle to be about still that's two years?

Charles M. Osborne - Executive Vice President and Chief Financial Officer

Yes that's what was our approach in trending on average. I think as Mark said about 1.8 this... the contracts done this quarter.

Dr. Mark N. Greene - Chief Executive Officer

That's right and we see that number remaining roughly constant.

Tony Wible - Citigroup Global Markets

Okay. Last question is just, can you comment on how Falcon did this quarter, in particular the new product?

Dr. Mark N. Greene - Chief Executive Officer

We are calling out additional I mean revenues by pipeline. but I mean we've being experiencing some recovery in Falcon, as we deal with some of the issues that we have guided and it certainly hasn't declined but it's we are really looking for it to perform in '08.

Tony Wible - Citigroup Global Markets

Okay, great. Thank you.

Dr. Mark N. Greene - Chief Executive Officer

Thank you.

Operator

And your next question comes from the line of Kevane Wong.

Kevane Wong - JMP Securities

Hi, how you are doing guys. I guess first looking at the scoring segment, I know before when you are looking at this quarter, you are as it was indicated that 3% to 5% growth that you would be seeing. The actual growth was lower than that. Was that drop off because of the drop in some other parts of the scoring or is that because of the pricing being a little more aggressive down than you are expecting?

Dr. Mark N. Greene - Chief Executive Officer

I think this is a combination of two things. The pricing pressures were somewhat stronger than we had anticipated and although volume grew, it grew by a little bit less than we had seen in the prior quarters. So as the business was up just over 1% instead of 3%. Sort of in the range of what we might have expected, but a little bit brighter.

Kevane Wong - JMP Securities

Got you. And how should we think about that business. I mean as we go forward is this going to sort of start become more like what the viewers see where its, you get good volumes but you start having sort of flat to down, as pricing sort of on year-over-year basis. Is that a good way to start thinking about or how would you guide us to sort of think about that?

Dr. Mark N. Greene - Chief Executive Officer

I will let Chuck speak the guidance question. We have discussed this business in the past, I always think about it as a few times seems price quantity business price for many years has been on a downward trend and of late that downward trend, the commodization [ph] trend has somewhat accelerated. Q1 on the other hand, the volume as far as been growing. And of late the volatility in the plus economic sector has sort of benefited. So the Q has been up for us significantly the last two quarters. So, we've done okay of late. The way that we try to resist the key pressure going forward is through innovation. And so these new products scores that we refer to the FICO rate the global FICO score, debt capacity index, something called Transition Matrices which will show clients how FICO scores will perform during this business cycles, what can you expect to happen in your portfolio scores as the economy goes up or down, all of those are differentiators for us that we think will allow us to hold on to the teeth.

Kevane Wong - JMP Securities

Got you. Also just sort of follow on question but looking at the tool sales kind of nice jump that has been volatile. You've talked about sort of the pipeline. You've got it little better execution and visibility on that. Should we be expecting sort of your tool sales on the quarter-to-quarter basis, since the start becoming more stable around this level or we still looking near term for little bit a choppiness simply by the nature of these kind of sales?

Charles M. Osborne - Executive Vice President and Chief Financial Officer

No the sales cycles for these is longer than for some of our products and so but they also are very high value they add contracts they also include a fair amount of professional services so we still expect perhaps some near-term volatility, but over time we still look for that to continue to grow above the one of leaders in our growth rate. These are also very profitable contracts and so we expect that to continue as well.

Kevane Wong - JMP Securities

Got you. And also when you were talking about narrowing the number of the countries and from 30 really to 8 us as far as our focus. Would there be any charges that we should be looking on that basis as you sort of refocus?

Dr. Mark N. Greene - Chief Executive Officer

No, this is not a case of exiting country, this is a case of reallocating resources that put the majority of them where the opportunity is, but no charge is associated.

Kevane Wong - JMP Securities

That's okay. And then lastly sort of just is as far as Q4, is there a particular impact that we should be looking for from the fires from the San Diego operations, is it sort of negligible. How should we look at that?

Charles M. Osborne - Executive Vice President and Chief Financial Officer

No I think this is we aren't looking for the financial impact per se to Fair Isaac but it's certain kind of disruption to our staff in San Diego. We have many people displaced from their homes. That office had to shutdown for a week and right now they are in a very critical time, much of our finance staff is housed in San Diego as well as our product teams looking where we think...

Dr. Mark N. Greene - Chief Executive Officer

We had no damage to facilities and we are back fully in business for that location now. So it was disruptive but in the past.

Kevane Wong - JMP Securities

Got you. Perfect thank you.

Dr. Mark N. Greene - Chief Executive Officer

Thank you.

Operator

And at this time there are no further questions.

Dr. Mark N. Greene - Chief Executive Officer

Thank you very much operator. We appreciate it and we'll talk to everybody next quarter.

Charles M. Osborne - Executive Vice President and Chief Financial Officer

Thank you.

Operator

And this concludes today's Fair Isaac Corp.'s fourth quarter earnings call. You may now disconnect.

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Source: Fair Isaac Corp. F4Q07 (Qtr End 9/30/07) Earnings Call Transcript
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