Fair Isaac F2Q08 (Qtr End 3/31/08) Earnings Call Transcript

Apr.28.08 | About: Fair Isaac (FIC)

Fair Isaac Corporation (FIC) F2Q08 Earnings Call April 28, 2008 5:00 PM ET

Executives

John D. Emerick, Jr. - Investor Relations

Mark N. Greene - Chief Executive Officer, Director

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

Analysts

Kyle Evans

Michael Mill

Mark Bacurin - Robert W. Baird & Co.

Michael Nemeroff - Wedbush Morgan Securities

Operator

Good evening. My name is Keisha and I will be your conference operator today. At this time, I would like to welcome everyone to the Fair Isaac Corporation Q2 2008 earnings release conference call. (Operator Instructions) Mr. Emerick, you may begin your conference.

John D. Emerick, Jr.

Thank you and good afternoon, everyone. This is John Emerick of Fair Isaac and thank you for joining us for our fiscal 2008 second quarter earnings conference call. We issued a press release after the market closed this afternoon and you may access it on the investor relations page on our newly designed website.

A replay of this call will be available on our website approximately two hours after the completion of this call through May 26, 2008.

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 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 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 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, 2007, and our quarterly report on Form 10-Q for the period ended December 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 the 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 the Fair Isaac website.

On the call with me today are Marc 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 will turn the call over to Marc.

Mark N. Greene

Thank you, John. Good afternoon. Today I’ll review the results of our second quarter and update you on our progress in reengineering our company for growth. Then Chuck Osborne will provide further details on this quarter’s financial performance, the sale of our insurance bill review unit, and guidance for the balance of the year.

The financial results that we reported for the first quarter second quarter omitted our insurance bill review unit, which has been classified as a discontinued operation due to its pending sale. This unit typically contributed revenue of about $10 million per quarter. Without this unit, we reported revenue from continuing operations of $193 million and net income from continuing operations of $18 million. We also reported fully diluted earnings per share of $0.36 from continuing operations versus the $0.37 reported in the same period last year.

Excluding the $0.08 per share charge in the quarter for our previously announced reengineering plan, this means that we achieved on a pro forma basis our guided earnings per share of $0.44.

Finally, we had a solid quarter from a bookings perspective, with $99 million of aggregate bookings from continuing operations, including 20 deals over $1 million in value, three deals over $3 million in value, a revenue yield from the quarter’s bookings of 25%, and a weighted average life of 2.2 years for all executed booking contracts.

On a comparable quarter basis, excluding the mortgage product revenue in the previous year period, revenue from continuing operations grew by 3.1%. We had some good wins this quarter in our strategy machine segment, with several large contracts for our collections and recovery and account management products. Some of these gains were offset by a downtrend in our originations product but given where we are in the credit cycle, this is not surprising.

The performance of our professional services segment reflects a record quarter, primarily derived from collections and recovery and Blaze Advisor implementation services.

Our tools segment also showed strength on a year-over-year basis with increases in sales of Blaze Advisor and model builder products, and a new element of our tools portfolio, the Dash optimization product acquired in January, delivered its first incremental revenue to Fair Isaac in the quarter and introduced us to several dozen new clients to whom we can now cross-sell our remaining decision management portfolio.

Overall, I am pleased by this respectable performance, especially given the turmoil in U.S. financial markets which represent roughly 40% of our revenue base. Most of our portfolio is holding up well, even as clients trim their spending budgets or extend their purchasing cycles. We believe this resilience is due to the strong value proposition that our risk management and collection offerings provide in the current economic down cycle.

There is one segment of our business that continues to be adversely affected and that is our scoring business. We saw a 7% revenue decline year over year. This decline can be largely attributed to the pricing pressure we commented on last quarter in our pre-score product, as well as diminished volumes in the current quarter. The decline in pre-score volumes, which are the scores that banks use to target marketing programs, such as credit card campaigns and mortgage solicitations, squares with the recent comments by several U.S. retail banks about their reduced level of marketing activity.

Let me turn now to a discussion of our restructuring plan, which we called Reengineering for Growth, as announced on April 1st.

First, the rationale for this initiative is to protect earnings in the face of potential volatility in revenue, as well as to ensure that we are properly investing in our highest priority growth initiatives. In essence, this reengineering exercise carved out approximately $35 million from our annual operating expenses and we plan to reinvest up to 60% of the realized pretax savings in growth projects over a reasonable period of time.

We have proceeded in three steps with this exercise. First, we looked across our portfolio for products or units that did not line up well with our strategic focus on decision management. As previously announced, we identified six such units to divest, which accounted in aggregate for roughly $65 million of annual revenue and a similar amount of expense. We signed a definitive agreement to sell one of these units, insurance bill review, and we have since terminated activities relating to the Cortronics product and are now actively proceeding to divest the remaining four units.

Second, we reviewed our staffing profile to ensure that we had the right number and types of personnel in the right areas for growth. We identified 190 positions to be eliminated with a particular focus on senior management. Together with the sales units mentioned earlier, this staff reduction will leave us with approximately 2,550 employees instead of the nearly 3,000 when we started this exercise.

An additional outcome of this reengineering was that a redirection of existing resources towards our product development area as reflected in the R&D expenses that Chuck will discuss shortly.

Third, we redirected a portion of the realized savings to high priority growth areas. We have previously previewed this growth strategy. Let me drill down today on four high priority growth areas -- scoring, core markets, adjacent markets, and partnerships.

Beginning with scoring, our efforts to reassert leadership in the scoring business include a heavy emphasis on innovation. In this regard, I am pleased to report that the latest version of our classic FICO score, dubbed FICO ’08, is now being deployed by two credit bureaus. We are also rolling out the previously announced Fair Isaac Credit Risk Management Suite, which supplements conventional FICO scores with the innovative tools to assess the capacity of individual consumers to assume more debt and tools to asset the impact of changing macroeconomic conditions on banks’ loan portfolios.

In essence, we are leveraging our 50 years of scoring and analytic expertise to help our clients navigate through these difficult financial times.

Next with respect to core market expansion, we are making progress on two initiatives to increase our share of wallet with our core clients, namely financial institutions in North America. First we are gaining traction with our cross selling initiative, as illustrated by a multi-million dollar win last quarter at a global bank headquartered in Canada that plans to deploy our decision management suite across its organization.

Second, we continue on track with the next generation of our decision management applications, which will be enterprise class products, meaning that they span multiple financial instruments and channels. In particular, the enterprise version of our debt manager product for collections and recovery will be shipped in December of this year with support for credit, debit, and mortgage products. The enterprise version of our Falcon product for fraud management will ship in early calendar 2009.

Early client feedback concerning these planned releases is very favorable, especially given current credit market challenges.

Turning next to adjacent market expansion, if we define our home market as North American financial institutions, we see two clear opportunities for us to expand into adjacent spaces. Geographically, we remain focused on expanding into high growth financial markets. In China, for example, we have successfully expanded our business over the last two quarters to six leading financial institution clients and now have significant projects underway in risk management and Basel 2 compliance with four out of the top five Chinese banks. We’ve also built a healthy pipeline targeting top 20 banks in China.

Likewise, we are ramping up in similar fashion in Brazil, another high growth market. By focusing on a handful of such growth countries, we seek to expand our international share of business well beyond the 35% share reported this quarter.

The other adjacency we are pursuing is expansion into the financial supply chain elements of insurance, retail, and healthcare and we are seeing success in each of these three expansion industries.

Our insurance business grew 19% over the prior year quarter, driven by auto insurance engagements in the U.K. and the U.S. The retail team is readying an analytical cross-selling engine known as Best Next Action for a major retail client in the U.S., and our healthcare analytics work with partner H.A.I. continues on track for market introduction later this year.

Let me turn now to partnerships. Two quarters ago we began a concerted effort to build an indirect sales channel, starting with IBM and Accenture as strategic alliance partners. Both partnerships are now gaining good traction. Our sales alliance with IBM, which whom we also have a technology alliance, saw tow joints wins in Asia during the quarter and now has a pipeline of 27 leads worldwide worth $35 million in potential revenue to Fair Isaac.

Similarly, our Accenture partnership accounted for two U.S. wins in the quarter and has a global pipeline that includes 20 significant opportunities.

The takeaway here is that we’ve tightened our belt to protect earnings in the face of uncertainty and volatility in the U.S., while we are reinvesting a portion of the harvested savings in several focused growth plays consistent with our long-term growth strategy.

Now I will hand the call to Chuck to provide further financial details.

Charles M. Osborne

Thank you, Mark and good afternoon, everyone. I would like to provide a summary of our second quarter results and then conclude with our guidance for the balance of fiscal year 2008.

As announced on April 1st, the company entered into a definitive agreement for the sale of its insurance bill review business unit on March 31. The transaction is expected to close in the third quarter and the results for this business unit have been reported as a discontinued operation. Therefore my remarks here are geared to the continuing operations of our business.

As Mark already indicated, this quarter we put into action a restructuring plan aimed at cutting costs in certain areas of our business, reinvesting in areas that we believe will drive near and long-term growth in revenue, and deliver and finally improve EPS from continuing operations.

In addition to the headcount reductions noted by Mark, these cost-saving initiatives are aimed at non-client facing expenditures, such as travel and entertainment, use of consultants, and the use of contractors in non-revenue producing roles, as well as other variable expenses that we can reduce to protect our margins.

We have essentially completed the reduction in workforce announced on April 1 and are working to complete the facilities consolidations and the divestitures that were also announced at that time.

As we stated in our release this afternoon, our revenue from continuing operations for the second quarter of 2008 was $193 million, a 2% increase from prior quarter and a 1% increase from the same period last year.

As Mark indicated earlier, absent revenue from the mortgage products, the revenue from continuing operations grew at 3.2%.

The net income from continuing operations for the quarter was $18 million, a $3 million or 15% decrease from last quarter and a $4 million or 18% decrease from the same period last year.

Our net income was impacted by a $4 million after-tax charge relating to the restructuring effort announced on April 1st and higher research and development costs relating to a shift in focus towards development efforts from general and administrative efforts.

We reported fully diluted GAAP earnings per share from continuing operations for the second quarter of $0.36, a 12% decrease from last quarter and a 3% decrease from the same period last year.

On a pro forma basis, adding back the net charge for the restructuring plan equal to $0.08 per fully diluted share, the reported results were equal to guidance of $0.44.

The bookings from continuing operations for the first quarter were $99 million, from which we generated $25 million of current period revenue, as compared to bookings of $58 million in the same period last year, a 72% increase.

This quarter’s bookings were $6 million higher than the equivalent bookings guidance of $93 million. The average contract term for bookings executed this quarter increased from 1.5 years to 2.2 years.

As for the discontinued operations, second quarter revenues were $10.1 million versus $10.3 million in the prior year period. The operating loss associated with the discontinued operations for the second quarter of fiscal 2008 totaled $100,000 versus $200,000 in the prior year period.

Finally, the second quarter fiscal 2008 net income relating to the discontinued operation included a $4.2 million after-tax loss on the sale of the unit.

The company also expects to recognize an additional tax benefit of approximately $7 million in the third quarter upon completion of the transaction. This benefit, which represents tax deductions related to intangible assets of the business unit will result in an after-tax gain related to the sale of the unit and will offset the net loss recorded in the quarter.

Now let me walk through some of the more specific financial details with regard to our segments. Our revenue contribution from continuing operations by market segment is as follows: scoring contributed $39 million, or 20% of the total revenue for the quarter. Scoring revenue for this quarter reflects a decline of approximately $3 million, or 7% year over year. This decline is mainly the result of a drop in pre-score revenues. It is largely the result of the pricing pressure mentioned in last quarter’s earnings release, as well as a decrease in pre-screened marketing initiatives by our clients.

Strategy machines contributed $101 million, or about 52% of the total revenue for the quarter, as compared to $102 million, or 53% in the prior year period. Excluding the mortgage product that was divested in March 2007, strategy machine revenue actually increased over the prior year. This quarter’s results included year-over-year increases in collections and recovery and customer management, offset by year-over-year declines in originations and marketing services.

Analytic software tools totaled about $13 million, or 7% of the total revenue in the quarter, as compared to $9 million, or 5% of the revenue in the same quarter of last year. And the professional services segment of our business contributed $39 million, or about 20% of total revenue for the quarter, as compared to $37 million, or 20% for the same quarter of the prior year.

The percentage of this quarter’s revenue by vertical market is as follows: the financial services vertical was 67%; the insurance and healthcare vertical was 5%; the retail vertical was 7%; telcom, 4%; and all other verticals, which consist of government, myfico.com, and other miscellaneous categories, were 17%.

The company’s transactional or recurring revenue for the quarter represented approximately 71% of our total revenues versus the 77 reported in the same quarter in the previous year. The percentage of consulting and implementation revenues increased to 20% of our total revenues this quarter from 19% last quarter and in the same period last year.

Finally, one-time or license revenue was 9% of our total revenue versus 4% in the same period last year. The increase in the license revenue this quarter was attributed to a large customer management transaction that had pushed from the prior quarter and a large collections and recovery transaction.

Our international base increased from last quarter to this quarter, with approximately 35% of our total revenue coming from outside the United States. This is also an increase from the 28% that international revenue represented in the same quarter of last year.

Looking now at our expenses, the breakdown of our operating expenses as a percentage of revenue during the quarter was as follows: cost of revenues for the second quarter fiscal 2008 was approximately 38% as compared to 34% in the same quarter last year, which is the result of higher personnel costs relating to increased salary rates, lower attrition, and an increased use of consultants for professional services projects.

Our research and development costs were 11% for the second quarter of fiscal 2008 compared to 9% for the same quarter last year. This is the result of a shift in resources from G&A efforts to the increased level of product development initiatives now underway.

Finally, selling, general, and administrative costs for the second quarter were approximately 32% as compared to 35% for the same quarter last year. This decline was mostly from the shift in resources to development initiatives but was also impacted by a decrease in travel expenses under our cost management programs and from reductions to our share-based compensation.

Total operating income from continuing operations for the second quarter was $29 million compared to $37 million in the second quarter of last year. The pro forma operating income was $45 million before amortization of intangible assets of $4 million; $6 million from the restructuring and acquisition related charges, and $7 million of non-cash expense relating to stock-based compensation.

The lower stock compensation expense this quarter was the result of increased forfeitures and fewer equity awards, offset by the current quarter grants.

The reported operating income equates to our stated pro forma operating margin of 23%, a decline from the equivalent 27% pro forma operating margin reported in the same quarter last year. This decline is due mainly to the mix of revenue in the quarter, including the impact from an increase in personnel related expenses.

Other income net includes impacts from foreign exchange exposure, interest income, and interest expense. We realized a nominal gain from the hedging of our currency exposure during this quarter. The interest income decreased from the prior year quarter, the result of an overall decrease in market rates, coupled with a decline in our cash balances.

The increase in interest expense is mainly due to higher balances on our revolver, offset by a decrease in the applicable interest rate.

As we’ve previously mentioned, net income from continuing operations for the second quarter of fiscal 2008 was $18 million, an 18% decrease from the $22 million reported in the same period last year. In addition to the impact from lower margin revenue and restructuring plan charges, this net income was also impacted by a lower amount of interest income as our cash balances declined from one period to the next.

Our effective tax rate for the year is approximately 35% compared with the prior year period when the effective tax rate was roughly 42%.

Turning to our balance sheet, our cash and investments as of March 31, 2008 decreased by $47 million to $200 million, as compared to $247 million as of September 30, 2007. The primary sources of cash includes the receipt of cash provided by operations of $70 million, $15 million received from the exercise of stock options and stock issued under our employee stock purchase plan, and finally $43 million in borrowings under the revolving line of credit. These sources were offset by uses of cash during the period that included $107 million used in our stock buy-back activity, $13 million related to the purchase of property and equipment, $32 million related to the acquisition of Dash Optimization Limited, and $23 million related to the repurchase of our senior convertible notes from the open market.

To highlight our free cash flow for the trailing 12 months, we define free cash flow as cash flow from operations less capital expenditure and dividends paid. The free cash flow for the trailing 12 months is currently $132 million versus $152 million reported at the end of fiscal 2007. This decline is mainly attributed to the lower cash flow from operations in the current quarter. The prospective free cash flow will be impacted by the lower run-rate of operating expenses after the restructuring plan is fully implemented, higher interest expenses with the likely refinancing of our senior convertible notes in August, 2008, as well as from the changes in our working capital.

Net accounts receivable as of March 31st excluding the bill review business unit totaled $159 million, a $10 million decrease from the September 30, 2007 balance. Our day sales outstanding were approximately 75 days for this quarter compared with the 78 days reported at the end of fiscal 2007. While we continue to improve our collection process through more attention from the client relationship channels, we still attribute a portion of our DSO to longer payment terms with certain international clients, which we believe is an appropriate use of our capital given the financial strength of our client base.

Our property and equipment balance net of depreciation as well as net of the discontinued operation was $50 million, compared to the $51 million reported as of September 30, 2007. This was the result of a net impact from $12 million of depreciation expense recorded for the year, offset by the $11 million of net capital expenditures.

We increased the amount outstanding under our revolving credit facility by $23 million this quarter, bringing the total outstanding to $213 million. The proceeds were directly used to fund the purchase of our senior convertible notes at a slight discount to the par value.

This quarter, we also purchased a total of 1 million shares of our common stock at a cost of $24 million in the open market, representing 2% of our total outstanding shares at the start of the quarter.

This quarter our fully diluted share count decreased from the 51 million shares reported last quarter to 49 million shares, as result of both the weighted impact of shares purchased this quarter and the full impact of shares purchased in prior quarters.

Finally, as of March 31, 2008, we still have $158 million remaining under this authorization. The company believes that the repurchase of our stock remains an attractive use of our cash.

Looking at our staffing levels, our total headcount at the end of the quarter was 2,925 compared with the 2,896 reported at the end of the first quarter of fiscal 2008. This includes approximately 878 client facing positions versus the 705 client-facing positions we employed at the end of fiscal year 2006 and the 846 such positions we employed at the end of fiscal year 2007.

So turning now to guidance, this period we have elected to provide guidance for the second half of fiscal 2008 versus the quarterly guidance we would normally provide. This decision was based upon the complications that are created from estimating the timing of the various components of our restructuring plan.

The guidance for the second half of fiscal 2008 is $380 million for revenue from continuing operations and $0.74 in GAAP earnings from continuing operations per fully diluted share. Therefore, our full year revenue guidance from continuing operations for fiscal 2008 is now $763 million and GAAP earnings per fully diluted share of $1.51. This includes guidance of $16 million to $18 million of pretax savings that result from our restructuring plan, as well as a nominal effect to both revenue and earnings from the stated divestitures. These savings are then partially offset by the reinvestment of $3 million to $4 million in areas of our business that we believe will derive near and long-term revenue growth.

This guidance assumes a refinancing of the senior convertible notes between now and August 2008. Finally, for modeling purposes, we have assumed a 35% effective tax rate for the remainder of fiscal 2008 and opened market share repurchases at the pace of about 1 million shares per quarter.

We expect bookings from continuing operations for the second half of fiscal 2008 to be $200 million, with roughly $25 million of current period revenue from these bookings in each quarter.

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

Mark N. Greene

Thanks, Chuck. Let me wrap up. Our management team fully understands the importance of achieving profitable revenue growth. We like the markets that we operate in and the assets that we bring to bear. We are now executing a focused set of plays to strengthen our scoring business, grow our indirect channels and partnerships, and boost revenues in both our core markets and adjacent markets. Until we see the revenue growth actually occur, we are closely managing costs, especially in the non-client-facing parts of our business.

A few other notes of interest -- first we kicked off our InterACT conference, the Smarter Decisions conference, here in San Francisco last night. The theme of the conference this year is managing risk in turbulent times and we are focused on how our current and prospective clients can use decision management to improve the health of their business. We have over 500 clients and partners in attendance and our opening workshop on analytics saw record attendance.

Second, in the middle of this InterACT excitement, we are hosting our mid-year analyst day tomorrow morning at 9:00 o’clock Pacific Time. We hope that you all can join us as we discuss our business results and outlook in greater detail. For those not able to join us in person in San Francisco, we’ll be webcasting the analyst day session. You can reach the proceedings from the IR portion of our corporate website, fairisaac.com.

We may now begin the question-and-answer period. Thank you.

Question-and-Answer Session

Operator

(Operator Instructions) There are no questions at this time, sir. Hold one moment, sir. We do have a question from the line of Kyle Evans.

Kyle Evans

Thanks for taking my questions, guys. Maybe just starting off on the scoring segment, can you help piece apart with respect to that 7.2% decline the exact impact of the pre-score decline versus some volume decline in the core business? By that, I mean are we talking about 500 basis points of the 720 coming from pre-score and the balance being volume declines?

Charles M. Osborne

You know, there’s a couple of things here. We have some of our clients are on a tiered pricing basis and so the impact of their use of scores brings down both price and then a price times quantity impact. For the sake of discussion right now, I would make the -- most of that, the pre-score impact probably at maybe three of those percentage points and the remainder at the volume.

Kyle Evans

Okay, and in pre-score, is that pricing pressure that you are dealing with on a month-by-month, transaction-by-transaction basis or are you in the process of resigning some longer term deal so they --

Charles M. Osborne

We have contracts that are being renegotiated from time to time and they are impacted by negotiations on a periodic basis, and then the customers are executing against those contracts over time.

Kyle Evans

And is there some light at the end of the pricing tunnel on pre-score or is that something you expect to keep going here for the balance of your fiscal ’08?

Charles M. Osborne

We think that that’s something that we are going to live with for a little while here. We’ve got a couple of variables outside of just the volume movements that are impacting pricing and -- but it’s something that we are aware of and dealing with and we negotiate these contracts on a case-by-case basis.

Kyle Evans

Okay. In the tools side of the business, you had eight deals last quarter that pushed at about $7 million of revenue. Can you give us an update on those eight deals?

Mark N. Greene

Six of them became good, one was a no-decision and one is still in the pipeline.

Kyle Evans

Okay, and can you make maybe some broader comments on what you are seeing in terms of the bigger sales cycle as it relates also to the Falcon license piece?

Mark N. Greene

Good question. As you might guess, we talk regularly to our customers these days about how their budgets are holding up. For the most part, the budgets are intact although many of the clients are doing critical reviews of how they use those budgets. But we are not hearing too many reports about budget cuts. What we definitely are seeing, and I talked about this on last quarter’s call, is a lengthening of the sales cycle. So more rounds of approval needed, longer review and approval cycles. Our sales cycles are lengthening, as I suspect many other vendors are in this environment.

So budgets seem at least for the kinds of things we sell to be holding fairly steady but it is harder to get at them.

Kyle Evans

Okay, so last question -- if I add back the roughly $10 million to the reported revenue number, you came in just a little bit below. I wouldn’t call it a miss but was there anything that was a little bit softer than you expected when you issued the guidance on the period?

Mark N. Greene

No, I think scoring tells most of that story, right? So on a pro forma basis, we had guided to 205 on revenue. You did the math right. We came in at 203.3 on a pro forma basis, so it was a miss of a little over $1 million, and I think that’s a scoring story.

Kyle Evans

Okay, thanks.

Operator

Your next question comes from the line of Michael [Mill].

Michael Mill

Thank you. Two clarifications on the guidance -- the $380 million, what is that compared to on a pro forma basis if -- or however you want us to be looking at it? And then I have a follow-up.

Charles M. Osborne

You are still comparing that to what, against, without insurance bill review you are asking -- that’s about $10 million a quarter.

Mark N. Greene

Just a hair over $10 million a quarter, so you’d add back in 20, 20-plus to get the pro forma.

Michael Mill

Okay, and then on the guidance for $0.74 in the fiscal second half, compared that consensus -- I don’t know if consensus is funky or not for the divestitures but it’s quite a ways above that. Is there a charge of any sort -- you mentioned something about some type of write-downs that will be offsetting. Can you just clarify if that $0.74 GAAP number has -- is weighed down by any other items?

Charles M. Osborne

No, that will be a straight calculation of earnings at that point. There is, on continuing operations, there will be an -- in discontinued ops, there is that $7 million tax benefit that comes back and helps earnings, but that is in disc ops. That’s not in earnings from continuing operations.

Mark N. Greene

We expect that to be realized in our current quarter, which is third fiscal quarter.

Michael Mill

Okay. Thank you.

Operator

Your next question comes from the line of Mark Bacurin.

Mark Bacurin - Robert W. Baird & Co.

I wanted to follow-up with a couple on the guidance; so the $0.74 you are saying does or does not include that $7 million tax benefit?

Charles M. Osborne

It does not include.

Mark Bacurin - Robert W. Baird & Co.

Does not include -- okay, so that $0.74 is continuing operations?

Charles M. Osborne

That’s correct.

Mark Bacurin - Robert W. Baird & Co.

Okay, so if we are looking at $380 million of revenue in the back half of the year, it’s about the run-rate that you are on now, and I think you just did $0.88 -- or I’m sorry, you are looking for $0.74, which is well below kind of the revenue or the earnings number that you are at first half of the year and I’m just wondering, you’re talking about $16 million to $18 million of extra pretax savings and only about $3 million to $4 million of that reinvested, so I’m trying to figure out how a flattish revenue number gets you to a lower EPS in the back half of the year.

Charles M. Osborne

First of all, we are bringing down revenue from prior guidance. I think you can see that 380. I mean, our guidance really assumes another about $15 million of revenue on top of the $20 million taken out for bill review. And then on top of that, we are assuming a refinancing of the convertible some time in the August timeframe, which will have a little bit of an impact. We will probably have to advance or refinance that, and we’ll actually have some negative arbitrage here on the interest for some period of time.

Mark Bacurin - Robert W. Baird & Co.

So most of --

Charles M. Osborne

-- I mean, our coupon on that debt is 1.5 and I think you know current rates for us will be more like 6%, 6-plus.

Mark Bacurin - Robert W. Baird & Co.

Okay, so most of the delta from the Q2 numbers you just reported on a pro forma basis to that back half is a stepped up interest expense, it sounds like.

Charles M. Osborne

And the revenue -- and the revenue come down off of our revenue guidance. The revenue guidance is coming down beyond that dictated by simply the discontinued ops.

Mark Bacurin - Robert W. Baird & Co.

Is there a mix shift in there in the second half because that 380 is still roughly the same run-rate as your second quarter number, of which --

Charles M. Osborne

Our prior guidance assumed a higher growth rate on revenue in the back half of the year.

Mark Bacurin - Robert W. Baird & Co.

Yeah, I understand. I’m just trying to rectify $193 million of revenue in the second quarter or roughly $0.44 of pretax, or after tax EPS, which will be $0.88 implied for the back half of the year and you are saying $0.74 on a similar run-rate of revenue to which you did in Q2. So I guess I’m trying to figure out what are the extra expenses coming from given that you’ve got $16 million to $18 million of savings coming in? It sounds like most if it is maybe in that interest expense line.

Charles M. Osborne

Well, that is a big part of it.

Mark Bacurin - Robert W. Baird & Co.

Okay. Thank you.

Operator

Your next question comes from the line of Michael Nemeroff.

Michael Nemeroff - Wedbush Morgan Securities

Just a couple of questions; Mark, in your comments you had said that budgets are still there yet the guidance for the back half of the year is well below, even stripping out the $20 million of the disc ops, so I’m just trying to reconcile your confidence in grabbing those dollars relative to what the guidance implies. Can you maybe clarify that? And then I’ve got a follow-up, please.

Mark N. Greene

Well, I indicated a couple of things. First of all, I think that if you were to phrase this in terms of visibility, that the current markets are unlike things that many of us have ever seen before, so we are being conservative since we don’t have the normal visibility into spending intentions. The customers do tell us that the budgets are largely intact but they clearly are also showing us from their purchasing behavior that they are taking longer to say yes. So we’ve gone conservative in these numbers, which seems appropriate for the environment that we are in. Clearly management’s objective would be to over-achieve but the guidance is reflecting some concern about whether those budgets will hold up over time.

Michael Nemeroff - Wedbush Morgan Securities

On the scoring side of the business, the decline in scoring actually was probably the largest that I’ve seen since I followed the company in a long time. How much of the decline -- could you talk maybe relative pre-score versus the classic FICO score and give us a little bit of a breakdown of just where the weakness is coming from? Is it competition from Vantage Score? Are you losing any customers? Are there -- is it a much lower volumes on the classic FICO score business? Could you just help us understand that a little bit?

Mark N. Greene

Well, there is no question that we still see some pressure on pre-score due to the Vantage Score but also the -- our customers are doing fewer campaigns. They are actually pulling back on their campaign activities that drives this. There is also some reduction in just the volumes that are both now and expected on the classic score, and I put that for sake of discussion maybe at 60% against the pre-score impact. But the second quarter for us is also typically our lowest in terms of the seasonal aspect of the scoring. We’ll see some help for that in the back half and really some of this is our own projection as to the impact of the economy on origination activities and score pulls as a result of frankly just the credit crunch going on right now.

Michael Nemeroff - Wedbush Morgan Securities

And then just can you comment on -- in the past you’ve given cash flow guidance. Can you just tell us what you are expecting for cash flow, maybe free cash flow for the rest of the year and what kind of a run-rate we can look forward to?

Charles M. Osborne

Our free cash flow is running at about $140 million, $145 million and I think we expect that to continue through the remainder of the year.

Michael Nemeroff - Wedbush Morgan Securities

Okay. And then just one last question -- the FICO ’08 score, is there any incremental revenue from the bureaus running FICO ’08 or is it just a better score? Is there any incremental benefit to Fair Isaac from using it, other than just a better score?

Mark N. Greene

Better score.

Michael Nemeroff - Wedbush Morgan Securities

Okay. Thank you.

Operator

There are no further questions at this time. Do you have any closing remarks?

John D. Emerick, Jr.

No, I think we are all set. Thank you very much and we’ll look forward to hearing or seeing everybody tomorrow at our analyst day.

Operator

This concludes today’s Fair Isaac Corporation Q2 2008 earnings release conference call. You may now disconnect.

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