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Executives

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

Mark N. Greene - Chief Executive Officer

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

Analysts

Tony Wible – Citigroup

Kevane Wong - JMP Securities

Tom Ernst -Deutsche Bank

Chitra Sundaram - Cardinal Capital Management

Jonathan Cohen - JHC Capital Management

Fred Searby – JP Morgan

Chris Walter – Merrill Lynch

Fair Isaac (FIC) F1Q08 Preliminary Results Call January 14, 2008 5:00 PM ET

Operator

I would like to welcome everyone to the Fair Isaac preliminary first quarter 2008 results conference call. (Operator Instructions) I would now like to turn the conference over to Mr. John Emerick. Sir, you may begin.

John D. Emerick

Thank you very much, Felicia and good afternoon, everyone. This is John Emerick of Fair Isaac and thank you for joining us this afternoon on such short notice for this preannouncement of our fiscal 2008 first 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 this call through March 14, 2008.

I’d like to remind everyone that except for historical information, the statements made on this call should be considered forward-looking within the meaning of the federal securities laws, including the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995. These statements 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 press release distributed today should be viewed with caution. These statements are subject to risks and uncertainties, which could cause actual results to differ materially from those expressed and/or implied by these statements.

Additional information concerning these risks and uncertainties are set forth from time to time in our SEC filings, including our annual report on Form 10-K for the fiscal year ended September 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.

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.

Mark N. Greene

Thank you. As you know, we issued a press release earlier today that provided preliminary first quarter 2008 results as well as revised second quarter and full year fiscal 2008 guidance. On this call, we’ll discuss both our expected financial results for the quarter and our guidance.

I’ll now turn the call over to Chuck Osborne for his review of the preliminary financial results; then after his remarks I’ll provide an assessment of the situation and Chuck and I together will be available to answer questions.

Charles M. Osborne

Thank you, Mark. As you’ve all seen in our press release this afternoon, we released preliminary estimated results for reported revenues, net income and earnings per share for our first quarter of fiscal year 2008. Based on the unaudited information we now have available, our revenue for the first quarter of 2008 is expected to be in the range of $198 million to $200 million.

These results represent a decrease from the $208 million reported in the same period last year, as well as a decrease against the $205 million guidance we provided last quarter. We believe this reflects a general softness across all of our market segments.

Net income for the quarter is now expected to be in the range of $19 million to $21 million, against $31 million in the same period of the prior year and implied guidance of roughly $24 million. We expect our fully diluted GAAP earnings per share to be in the range of $0.37 to $0.39 against our guidance of $0.45 and our annualized tax rate is expected to be 35.1%.

Bookings for the quarter are expected to be in the range of $100 million to $105 million, as compared to our guidance of 95 million of new bookings. The increased bookings results are primarily related to three large multi-year contracts in Marketing Solutions and Bill Review and these contracts have a longer contract life than the other contracts we signed this quarter.

Now, let me walk you some of the more specific financial details. Our revenue contribution by market segments is now expected to be as follows:

Scoring is expecting to contribute in the range of $42 million to $44 million. The scoring revenue for this quarter reflects a decline of approximately $2 million year over year. This decline reflects a drop in prescore revenues that is largely the result of the pricing pressure mentioned in last quarter’s earnings release, as well as a decrease in prescreen marketing initiatives by our clients.

Strategy Machines is expected to contribute $105 million to $107 million against $110 million in the same quarter of the prior year. The Strategy Machine revenue decrease from the prior year is mostly due to the sale of the mortgage business unit in March 2007, which included approximately $4 million of revenue in the year-over-year period. We believe this quarter’s results will include year-over-year increases in collections and recovery and consumer and fraud, all offset by year-over-year declines in analytics, customer management, Bill Review and marketing services.

Analytic software tools is expected to total in the range of $13 million to $15 million of revenue for the quarter as compared to $14 million of revenue in the same quarter of the prior year.

Professional services is expected to contribute in the range of $36 million to $38 million of total revenue for the quarter as compared to $39 million in the same quarter of the prior year. This decline against the prior-year period is mostly due to several unusually large professional service milestones that were recorded in the first quarter of last year, as well as several transactions that were closed this quarter that required the deferral of revenue for accounting purposes.

Looking at our share repurchase program, we were able to remain in the open market and repurchase a total of 2.1 million shares at an approximate cost of $82 million during the first quarter. This was mostly done under the $250 million repurchase plan authorized by the board in November 2007. As of December 31, 2007, we still have 182 million remaining under this November ‘07 authorization.

Now looking at for the second quarter and an update of our full fiscal year guidance. In light of our execution issues and an increasingly challenging credit environment and US economy, we believe we should adopt a more cautious outlook for the balance of this year and therefore we are adjusting our guidance for fiscal year 2008.

The second quarter revenue guidance will be $205 million and earnings per share guidance will be $0.44 per fully diluted share. The full year revenue guidance will be reduced from $850 million to between $825 million and $835 million. In addition, we are lowering our earnings per share guidance from the $2 per fully diluted share reported last quarter to between $1.80 to $1.90 per fully diluted share.

Our expectation is that operating margins will likely compress further. This compression for the remainder of fiscal 2008 is mostly based on the decline in revenue and our high operating leverage model, as well as the potential for a small impact from the continued investments in rebuilding our business.

We expect to release our final reported results for the first quarter of fiscal 2008 on Tuesday, January 22, and will, as usual, hold a conference call after the close of the market on that day to discuss these results.

Now, let me turn the call back to Mark for further comment.

Mark N. Greene

Thank you, Chuck. Clearly these preliminary results for our fiscal first quarter fall well short of expectations and the growth plans that we have for the company. We’ll provide a further assessment of this past quarter when we report the final results on January 22, but let me summarize our current view.

First, our business outside of North America remains healthy. Our problems last quarter were limited to North America, which accounted for essentially all of our estimated revenue shortfall.

Second, we can decompose this shortfall into three pieces. First, our enterprise decision management tools and applications business fell almost $5 million short of its plan. Most of this was due to software sales that slipped from the fiscal first quarter into the current quarter. These are not losses, but rather deals that we expect to close near term. Second, our professional services is roughly $1 million short of its plan due to revenue deferral requirements on several implementation projects.

Third and of note, our scoring business met its plan, which was a decline of approximately 4% year over year. This means that scoring prices continue to compress as we had expected, while volumes generally remained steady. However, we are starting to see signs of the volumes for both prescores -- which are scores used for marketing solicitations -- and risk scores -- which are generally used for underwriting activities -- could experience a decline in the near-term quarters.

Historically, a credit crisis in US financial markets has tended to benefit our scoring business, as clients use more scores than ever to assess risks. But we now expect to see a modest contraction in the volume of scores used for prescreen marketing initiatives.

We have factored in this combination of market headwinds and execution challenges when setting current quarterly guidance to $205 million in revenue and $0.44 in fully diluted EPS; and in adjusting our full year guidance to between $825 million and $835 million in revenue and $1.80 to $1.90 in fully diluted EPS.

We continue to believe in the attractiveness of the predictive analytics and decision management market and in the relevance of our products to that market, but we recognize there is considerable work yet to do to fully realize our growth potential. Our January 22 call will provide further details on how we are addressing those challenges.

With that, operator, you may now open the lines for questions please.

Question-and-Answer Session

Operator

Your first question comes from Tony Wible – Citigroup.

Tony Wible - Citigroup

Have your thoughts on buybacks or strategic M&A changed at all, given the challenges in the current backdrop?

Second, I was hoping you could spend some time weighting the issues you went through; a couple of reasons for the decline, but it seems like there is more of an impact on the bottom line than there is at top line. Is this more really just a pricing issue than anything else?

Charles M. Osborne

Tony, let me take for just a moment the first part of your question. I think the share repurchase authorization remains as we say here, we’ve got about $180 million remaining under that authorization. I’m sure our board will continue to evaluate that and certainly at these prices, we believe the stock is an attractive buy.

Nevertheless, we also have in our sights the possibility of M&A activity and we’re looking at resources to conduct that as well as opportunities present themselves. So we’re not retreating from either of those two potential uses of capital. Our cash flow remains strong and so we feel like we are just in a very good position to pursue both here and the future.

I think on the January 22 call, we’ll probably have some more conversation on both fronts. Let me turn the second part of that back to Mark relative to revenue.

Mark N. Greene

You’re looking for the weighting on what was behind the revenue shortfall and I think it’s equal parts, what we characterize as market headwinds and some execution challenges.

What we did see in the late part of the quarter was a number of deals pushed to the current quarter so we think the spending opportunity is still out there. It was hard for us to capture it all in time for the close of the quarter.

But the market headwinds thing is less of a commentary on pricing pressures which are continuing about as they were before; it’s more commentary on concern about volumes of scoring as customers begin to retrench their level of activity.

Tony Wible - Citigroup

Is it fair to say that roughly half of the miss this quarter you anticipate getting at some point over the back half of this year or over the next part of this fiscal year?

Mark N. Greene

Certainly.

Charles M. Osborne

Yes.

Tony Wible - Citigroup

On the headwinds, is that all pricing or are you also seeing some unit losses in the face of competition?

Mark N. Greene

It’s a particular part of the business and that is in the scoring portfolio, pricing pressures have been around for some time in what we call prescore, which is the type of scoring that clients use for marketing activities such as soliciting for new credit cards. That pricing pressure has not really changed as it has been in the past, but the volume of the scores used in that part of the business is beginning to decline. So if you do the PxQ math that we’ve talked about in the past, that’s the area of vulnerability that we see because the Q is starting to come down.

Tony Wible - Citigroup

Your new guidance assumes that compression that you alluded to earlier in your comments for that risk that could be in this current quarter that we’re in?

Mark N. Greene

That’s right. So the guidance for the current quarter and the balance of the year takes into account our current view of that risk. That’s right.

Operator

Your next question comes from the line of Kevane Wong - JMP Securities.

Kevane Wong - JMP Securities

Maybe a different look at volume, is there an impact that you’re seeing from the share being taken away in VantageScore? Also when you’re looking at Strategy Machines. Probe has always been out there; articles recently as far as competition to Falcon. Could you address the competitive landscape and whether you see any sort of volume dropping because of competitors taking some share?

Mark N. Greene

Competitive pressures are about as they have been in the past, so neither increasing nor decreasing. What we see is some softness in the business really attributable to the fact that some of our clients are beginning to decrease their usage of scores. So as their business contracts, you read in the paper about the banks that are having difficulty in the credit markets; they are doing less new account origination activity and that impacts our business.

It’s not a result of competitive pressures. We’ve not seen losses once again to VantageScore so we have yet to have a loss to VantageScore. Neither are we seeing increased competition from the other software products that you mentioned which are certainly competitors, but they’re not moreso now than they have been in the past.

Kevane Wong - JMP Securities

How about as far as customers, particularly large banks, taking some stuff in-house? Has that even shown up yet or could happen in other regions?

Mark N. Greene

We don’t think so. What we saw at the end of the quarter was some deals that we thought would come good pushed to this quarter. You can make your own interpretation as to why. Our current view is that those deals remain viable. We expect some of them to close in the near term. There was an extended sales cycle, delayed buying/purchase program on the part of the clients late in the quarter. We don’t think they are taking that business in-house, but until the business is booked, that’s a risk.

Kevane Wong - JMP Securities

Equifax not telling the new FICO score, is that really having any impact? I wonder if you could comment on that.

Mark N. Greene

New FICO scores are due to roll out to the other two bureaus in the first half of this calendar year, and we remain in discussion with Equifax about opportunity to get it there but there is no announcement to be made there.

Kevane Wong - JMP Securities

In August you again have the convert issue that comes up; if the stocks remained at this level, I would imagine you’re going to have to refinance that potentially. Could you give us a little bit of sense of if you have made headway as far as making contingent plans for that already? What should we expect as far as that refinancing?

Charles M. Osborne

We have, to your point and you’re correct in this environment, you would expect that to be put back to us and we have in place short-term financing that would allow us to refinance that immediately and then execute against a longer-term placement as capital markets improve. But you’re correct; we’ve anticipated that.

Kevane Wong - JMP Securities

So the facility is in place, it’s simply a matter of whatever difference in the interest rate?

Charles M. Osborne

Correct.

Operator

Your next question comes from the line of Tom Ernst -Deutsche Bank.

Tom Ernst -Deutsche Bank

Part of your business actually benefits from the shifts in your customer base. Did you see any pickup in the business in terms of marketing or collections recovery, other sides of the business?

Mark N. Greene

You’re correct. The collection recovery part of the business did benefit from this and we’re still finalizing the numbers, but we expect to have an update on it next week. But that part of the business looks to have been strong.

Tom Ernst -Deutsche Bank

What would you say is the mix of your business that’s dependent on things you believe are sensitive, in a negative way, to the environment versus parts of your business that would be positively helped?

Mark N. Greene

The volume-based parts of our business are scoring and the portion of our EDM software which is run in a hosted fashion typically on behalf of the credit bureaus themselves, or the processors. Those two pieces of business, Chuck, amounts to?

Charles M. Osborne

Of course, scoring, as I said, a little over $40 million. A couple of other sensitive areas of course, as credit cards are closed or people stop using them, TRIAD has some effect; Falcon has some effect. These usage-based products would have some sensitivity to general economic levels.

The capital spending plans of financial institutions can also be impacted by installation delays and in adoption of new software that although we know they still wish to invest in these things, they will stretch out the investment cycle and the period of time in which they will do it. That has some nominal impact on us as well.

Tom Ernst -Deutsche Bank

How much do you believe you have your arms around your customers’ actual plans in terms of their capital spending next year, or is there a pretty wide range of uncertainty at this point early in the year?

Mark N. Greene

We think we have it pretty well around, and we have not actually heard customers talk about retreat in spending intention. So we’re not aware of budget cuts that they plan. There does seem to be extra caution; the sales cycles are slightly lengthening. There were deals, as I said, that pushed from last quarter to this. But as we talk to customers about the reasons why, we’ve yet to hear customers saying that they are slashing or cutting their spending intentions.

Operator

Your next question comes from the line of Chitra Sundaram - Cardinal Capital Management.

Chitra Sundaram - Cardinal Capital Management

I had a quick question on Falcon and TRIAD. Can you give us a sense whether those updates or upgrades have been launched, and if they have not how much has that affected the numbers that we’re seeing now?

Mark N. Greene

We are on the path that we announced it last year for upgrades so there’s been no retreat from our upgrade path. Therefore, customers are comfortable that we remain on the plan that we promised them. So we don’t see any delay in purchasing of those products due to concerns about product deliverables.

Chitra Sundaram - Cardinal Capital Management

I didn’t mean that. I wasn’t sure whether those two upgrades had already been launched, and if they’ve not yet been launched, I’m wondering whether the weakness you’re seeing or the numbers on the revenue side being a little different from what you had guided, whether part of that is because that upgrade launch has not yet occurred?

Mark N. Greene

No, there have been minor upgrades per schedule to both of those products in the last few months; major upgrades come later this calendar year.

Operator

Your next question comes from Jonathan Cohen - JHC Capital Management.

Jonathan Cohen - JHC Capital Management

A quick question on the convert, any thoughts about taking this thing out a little bit earlier than the put and call date this August? You pick up a little bit of a yield buy back, get rid of some of the shorts that are out there against your stock?

Mark N. Greene

It may well be. I think we will go with the best use of cash at any point in time. As we’ve already discussed, we’ve got the convert, if this is what you’re referring to, the convert actually is in a sense a bullet with the premium were there to be any tradable in shares. But the fact is, we know we’ve got probably a put staring at us in August and we’ve got a temporary facility in place to deal with that and then we’ll look for opportunity between now and then.

Jonathan Cohen - JHC Capital Management

Have you filed anything on that temporary facility?

Mark N. Greene

I’m sorry.

Jonathan Cohen - JHC Capital Management

Have you made any filings about the temporary facility as of yet?

Mark N. Greene

No, this is a bank line in place. We’ve announced this in the past, I think several quarters back.

John D. Emerick

Correct.

Operator

Your next question comes from the line Fred Searby – JP Morgan.

Fred Searby – JP Morgan

Falcon on the upgrade, is there a sense of clients waiting or holding back on spending until that’s out? Have you launched on that? It sounded like you were actually saying TRIAD and Falcon had seen some softness in client orders and I just wondered if you could give me some specifics on those two things.

Mark N. Greene

We’re not suggesting there was softness in orders on those two. What I would say in answer to your first part of your question is we’ve been pretty upfront about the roadmap for delivering upgrades, particularly on the Falcon product later this year. Many of our clients take stock of those upgrade plans when deciding when to purchase. So we announced the roadmap. We said when things are going to ship; we’re making good on that.

Customers continue to buy. It’s possible that some customers are waiting for the new versions. Of note, I would tell you that the Falcon product held up quite well during some peak usage over the holiday seasons when it was stressed to levels that we hadn’t seen before because there was a lot of card activity over the holidays and a lot of testing of fraud. We saw some record values being pumped through Falcon systems and it worked quite well.

So customers have taken note of that and I expect that as we talk to them about the new version coming, which will do at least as well, there will be a lot of interest.

Operator

Your next question comes from the line of Chris Walter – Merrill Lynch.

Chris Walter – Merrill Lynch

Could you comment on what you think Fair Isaac’s long-term business model looks like in terms of top line growth and margin potential and when you think that might be achieved?

Charles M. Osborne

Chris, we’ve spoken that over time we can still see a path to a growth rate of 7% to 10% in revenue. We’re obviously a ways from that now. It will come in a variety of ways. I think in the current environment with financial institutions and some of what’s happening in North America in our markets that is difficult to see, certainly this year. But as they recover and as we serve them we expect to share in that. I think we’ll probably provide some more color on that in the call on the 22.

Operator

At this time there are no further questions.

John D. Emerick

Thank you very much, operator and thank you, everyone. We look forward to speaking again on the 22.

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