Fair Isaac Corporation Q3 2008 Earnings Call Transcript

| About: Fair Isaac (FIC)

Fair Isaac Corporation (FIC) Q3 2008 Earnings Call Transcript July 23, 2008 5:00 PM ET

Executives

John Emerick, Jr. – VP and Treasurer

Mark Greene – CEO

Chuck Osborne – VP and CFO

Analysts

Michael Nemrah – Red Brush

Kyle Evans – Stephens Inc.

Michael Meltz – JP Morgan

Sitra Sanderman [ph]

Nate Otis – KBW

Operator

Good afternoon. My name is Kenneth and I will be your conference operator today. At this time, I would like to welcome everyone to the Fair Isaac Corporation quarter three earnings release conference call. (Operator instructions) I would now like to turn the call over to Mr. Emerick, Vice President of the Investor Relations.

John Emerick

Thank you, Kenneth, and good afternoon everyone. I am John Emerick of Fair Isaac and thank you for joining us for our fiscal 2008 third quarter earnings conference call. We issued a press release after the market close this afternoon and you may access it on the Investor Relations page of our website. A replay of this call will available by webcast on our website approximately two hours after the completion of this call through August 20th. I would like to remind everyone that except for historical information, the statements made on this call should be considered forward-looking within the meaning of the Federal Securities Laws including the safe harbor provision of the Private Securities Litigation Reform Act of 1995. These statements may include statements concerning our business strategies and our intended results, as well as statements concerning the 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 cause actual results to differ materially from those expressed and/or implied by these statements including the company’s ability to execute the reengineering plan and the manner and timeframe described in this call, the actual expense, revenue, and adding term in fact associated with the reengineering plan. Additional information concerning these risks and uncertainties are described from time to time in our SSE filing including our Annual Report on Form 10-K/A to the fiscal year ended September 30, 2007 and our quarterly report on Form 10-Q for the period ended March 31, 2008.

Fair Isaac disclaims any intents or obligations 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. Fair Isaac believes its product, raw mass, and similar marketing material should be considered forward-looking and subject to future change at Fair Isaac’s discretion. Any future functionality, features, or enhancements discussed today are Fair Isaac’s current projections on the product direction but are not specific commitments or obligations.

A reconciliation of certain supplemental pro forma information that we provide to 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 Mark Greene, our Chief Executive Officer and Chuck Osborne, our Chief Financial Officer.

Now I will turn the call over to Mark.

Mark Greene

Thank you John and thanks to all of you for joining today’s call. I will start by summarizing our results from last quarter and presenting our view of market conditions. Chuck will then provide financial detail and I will conclude with the strategy update and forward-looking guidance. We will be happy to take you questions after our preferred remarks.

We reported mixed results for our fiscal third quarter which ended June 30th. We reported revenue of $183.3 million compared with Wall Street consensus of $190 million based upon our guidance for the second half of the fiscal year. Most of the shortfall occurred in our scoring business in the U.S. and in general weakness in the sale of software licenses. At the same time, we managed our expenses well and we were able to protect profits. In fact, we reported GAAP earnings per share of $0.54 and earnings per share from continuing operations of $0.38 which met Wall Street consensus. What this mean is that the cost from engineering we started last quarter was effective and allow this to weather the economic challenges that confront us and our financial services clients.

Let me describe our revenue results more fully. We make money in four ways, by selling new software licenses, by charging maintenance for this software, by providing professional services, and through transactional services such as scoring and hosted applications where clients pay per click. Year-to-date, three of these revenues streams have grown nicely. Software license revenue was up 11%, maintenance is up 16%, and professional service is up over 3%. However, our transactional services revenue is down, nearly 8% year-to-date. That decline in transactional revenue is notable since it is both the largest and the most profitable of our revenue streams. Clearly the slowdown in U.S. financial markets is directly impacting our business. Nearly half of Fair Isaac’s revenue comes from banks in the U.S. and many of those institutions are seeing double-digit percentage declines in their own business. As their variance decrease, banks use bureau scores. It is therefore not surprising that our financial services revenues have shrunk by 6% so far this year. While we hope that the sector was stabilized in the near future, it is not likely that the U.S. banking industry will grow again before late 2009. In addition, we saw signs last quarter that this slow down is now spreading to Western Europe especially the UK and Spain. The challenging environment has the secondary effect. It’s causing financial institutions to become more conservative when purchasing new software licenses and hosted applications. Many of our clients have added new layers that review an approval to their purchasing processes which lengthens our sale cycle. Last quarter, this caused a significant number of deals that we expected to close in June to push in to the current quarter. This is not business that we lost, it is just business that is harder and taking longer to close.

I may now turn the call over to Chuck for further discussion of our financial results then I will return with an update on our strategy and forward-looking guidance.

Chuck Osborne

Thank you, Mark, and good afternoon everyone.

My remarks will be geared to the continuing operations of our business as we completed the sale of our Insurance Bill Review business on April 30th. The results to that unit are reported as a discontinued operation in our financial statement. As a reminder, the Insurance Bill Review unit generated about $40 million of annual revenue and was slightly negative in its contribution margin. Our revenue from continuing operations in the quarter was $183.3 million, a 5% decrease in the prior quarter and a 7% decrease from the same period last year. This reflects a one-time revenue reversal of $2.3 million which was a true-up relating to our recent agreement with Equifax. Net income from continued operations worth $18.8 million or $1 million or 6% increase over last quarter and the $7.3 million or 28% decrease from the same period last year. The income was helped by lower personal expenses, lower commissions, and lower direct materials cost was hurt by $1.4 million after tax charge for fervent cost and charges relating to facilities’ closures. The reported fully-diluted GAAP earnings per share from continuing operations of $0.38 or 6% increase from the prior quarter and 17% decrease from the same period last year. These results are consistent with the second-half guidance of $0.74 that we offered in April.

Bookings from continuing operations were $64.2 million from which we generated roughly $15.6 million of current period revenue. An 18% decrease as compared to bookings of $78.7 billion yielding $18 million in the same period last year. This reduced a yield of consistent with shorter-term bookings. The average contract term for bookings executed this quarter was 1.5 years down from last quarter’s average contract term of 2.2 years. Overall, we experienced reduced level of the bookings as financial institutions slowed their investments in new projects. Some of our largest deals are presented renewals of business already in place and therefore are not reflected in the new bookings. Income associated with the discontinued Bill Review Operations of the third quarter totaled $7.7 million or $0.16 per fully diluted share, primarily driven from a tax benefit that was received upon the completion of the sale of the unit. Our transaction or recurrent revenues for the quarter represented 73% or our total revenues against the 75% reported in the previous year. Resulting in implementation revenues increased to 21% of total revenues this quarter from 18% in the same period last year. Finally, one-time relations revenue was 6% of total revenue versus 7% in the same period last year. This quarter, 31% of total revenue came from outside the United States comparable to the 32% international share recorded last year.

Major expenses, our operating expenses presented to the percentage of revenue break down as follows. Cost of revenue was 37% compared to 33% on the same quarter last year. This is primarily the result of higher personnel cost relating to both increased salary rate and the shift in our revenue mixed toward labor incentive professional service activity. Research and development costs were 10% compared to 9% in the prior year. This reflects increased investments in our scoring initiatives and development of our decision management application. Finally, SG&A costs were 33% compared to 35% in the same quarter last year. This decline is the result of lower commissions, reduced share-based compensation, and decreased free travel expenses under our re-engineering program. Net income from continuing operations in the quarter was $18.8 million, a 28% decreased from the $26.1 million reported in the same period last year. This decrease resulted from lower revenue, continued investments in China, re-engineering charges, and lower net interest income. All of which were partially offset by lower operating cost and the lower effective tax rate for the quarter at 33%.

Looking at our free cash flow, we define free cash flow as cash flow from operations less capital expenditures and dividends paid. Free cash flow from the trailing 12 months is currently $136.8 million. This decline from historic norms can be attributed to lower revenue, re-engineering cost, and new investments in growth initiative.

Looking at our capital structure in May, we announced the completion of a private placement of $275 million in senior notes. Senior notes we issued in four series with the maturities ranging from 5-10 years. Note that we have a weighted average interest rate of 6.8% and weighted average maturity of 7.9 years. We used the proceeds from the private placement to reduce the amount of spending under our evolving credit facility by $175 million and the bridge of 100 million are convertible to venture in the open market taking full advantage of the short-term rate arbitrage. This quarter, we also purchased a total of 414,000 shares of our common stock at the cost of $10 million in the open market. Our fully diluted share count is decreased from the 48.9 million shares reported last quarter to 48.7 million shares and that results of full share repurchase activity and share issuances relating to share-based compensation.

As of June 30th, we had a $148 million remaining under existing share repurchase authorization. The company continues to believe that the repurchase of our stock is attracted to use of our cash.

I will hand the call back to Mark to discuss our strategy and forward guide.

Mark Greene

Thanks, Chuck. Let me turn now to an update on how we are running the business. We have three priorities as we manage through these challenging times. First, to stay disciplined in our sales execution; second, to continue to tighten the management expenses, and third, to keep investing in our decision management growth initiatives in order to capture market spending when the economy eventually improves. In the sales arena, our teams have all completed in formal sales management training program to convert opportunities into signed deals in an orderly predictable way. We are following this discipline closely during the fourth quarter when timely completion of deals can be challenging due to vacation schedules. Concerning expenses, we announced in April, a reengineering program designed both to protect earnings by reducing cost and to reallocate resources towards growth initiatives. Although, the target for that initial reengineering exercise was to eliminate $35 million in current and plan operating expenses, we ultimately identified $48 million in such savings which are largely now in place. In light of continued weakness in the markets we serve, we believe it is now prudent to eliminate a further $26 million of existing and plan expenses as part of our ongoing reengineering work. You will achieve this additional expense reduction by further trimming our facilities cost, modestly reducing our current onboard headcount, and restricting new higher activity to critical roles for the rest of the fiscal year. By concentrating these cuts in support in back office areas, we are able to maintain healthy staffing levels in areas that produce revenue, such as sales and professional services. The net result of these actions and the investments that we continue to make in our business is reflected in the guidance that we will provide you today for the fourth quarter and which will provide in the fall for fiscal 2009. This reengineering work allows to us to reallocate resources towards the three prongs of our decision management strategy; analytics, tools, and applications, and I’d like to update you on those areas now.

In analytics, we continue to strengthen our leadership in scoring in industry that provides a goal to create. We accomplish this partly to constant innovation including the updated FICO 08 scores which are now been rolled out as well as new offerings such as a timely credit capacity index which helps lenders to access a borrower’s ability or capacity to take on a particular amount of new indebtedness. Or perhaps the best way to strengthen our scoring leadership is by improving our relationship with major credit bureaus.

Last month, we announced an important partnership with Equifax, the largest U.S. credit bureau, under which we are now collaborating to sell the existing analytic products and develop new ones. I feel very good about this Equifax partnership which is off to a promising start. Given the difficult economic environment, it will take sometime before the Equifax relationship and our product innovation work restore growth to scoring but an important building block is now in place. Analytics authorized its competitive differentiation and we plan to keep investing in these key assets.

Next, our tools business is already on a growth path, having grown 15% year to date. Much of this growth comes from our flagship Blaze product which continues to win awards as the best rules management engine and continues to rank no. 1 in terms of market share. We are investing to maintain our leadership position for Blaze including integrating the optimization capabilities from our Dash acquisition needed earlier this year.

Most encouraging is our progress in the applications area where we are pruning our portfolio of all their products and working hard to develop the next generation of decision management products. Nearly 300 of our employees in development and product management are now at work on this decision management suite and they are being very productive. After years of talking about decision matching applications, we are now within a few months of actually shipping these applications. We are on track to ship the first of these products at Manager 7 in December 2008 followed by an exciting new version of our Falcon Fraud Manager product in April of 2009. These and subsequent offerings will be enterprise ready, meaning they support multiple financial products, multiple channels, and use a common services oriented architecture and common components including Blaze to achieve a high degree of interoperability. We will be providing updates on the expected revenue ramp from these new products when we issue our Fiscal 2009 Guidance this fall. For now, let me just say that our largest and most demanding clients are watching the development of these decision management products carefully. They like what they see and several banks in the U.S. and Europe are beginning to adapt key components of our decision management architecture. Our integrated technology organization is making good progress in this development work. Even in the face of tight resources and organizational flux. The ideal leadership continues to deliver against its goals despite the recent departure of our Chief Technology Officer. I’m confident that our search for a new CTO will result in a strong successor. Our re-engineering work also allows us to keep investing in targeted market and industry vertical growth initiatives hoping to diversify our revenue mix.

In particular, we are well along in building flagship offerings for healthcare which is our predictive analytic’s work in partnership with Conant’s formerly known as HAI and for retail industry, where our product is called “Best next action” and in insurance industry where our product is called “Multi-line Claims Fraud.”

We are also pursuing growth opportunities geographically in Latin America and in China where we secured engagements with seven of the top 10 Chinese banks since opening our offices there just one year ago. So our re-engineering work is not just about cutting cost to protect earnings, it is also about reallocating resources towards efficient management. I see growing evidence that this will be one of the next hot spots in technology and Fair Isaac aims to be the leader in this phase. Turning to guidance from a continuing operations for our fiscal fourth quarter, we forecast $187 million in revenue and GAAP earnings per fully diluted share of $0.36. Therefore, our full year fiscal 2008 revenue guidance from continuing operations is now $753.6 million using GAAP earnings per fully diluted share of $1.52. This reflects the impact of the previously announced by investitures and the further reduction of $26 million in operating expenses that is now underway. This guidance assumes repayment of the Senior Convertible Notes between now and August. For modeling purposes, we have assumed the 35.0% effective tax rate for the remainder of fiscal 2008.

Finally, we expect bookings from continued operations in the fourth quarter to be $90 million building roughly $20 million to $24 million of current period revenue.

To wrap up, clearly our business is challenged in the near term by the unprecedented turmoil in financial markets but we continue to believe strongly in our strategy and our long-term growth prospects. The managing team is committed to navigating successfully through the current rough orders and we have asked all of our employees to turn out the noise and focus on the work at hand. We do so keeping our core values in mind including a strong focus on clients and emphasis on innovation and a quest for high performances.

Chuck and I will now be happy to take your questions and discuss any of these of matters further. Ken, please begin with question-and-answer session.

Question-and-Answer Session

Operator

Absolutely, sir. (Operator instructions) and I will begin the question and answer session with the line of Michael Nemrah from Red Brush. Sir, your line is open.

Michael Nemrah – Red Brush

Thank you, thanks for taking my question. Good evening gentleman. Just a couple of questions, it has been a couple of years since we’ve seen the scoring revenue this low, if you could just parse out may be how much of that decline is coming from the decline in volumes? What is coming from price in pressuring the advantage score in the past since the advantage score has been making you sharpen your pencils on pricing and how much has been lost just right out from competition? Can you just – and I have a follow up please.

Chuck Osborne

Okay, in past calls, we have talked a lot about pricing pressure on scoring. This quarter the team in fact that is less of the fact that this is largely evaluated on particularly in the PreScore area. We do not sense that there – it’s hard to know how much of that volume reduction is related to competition, but it does seem to be tied to the diminished business values of many of our banking clients.

Michael Nemrah – Red Brush

Though, Americans Express had made a comment on their call that their business would not be getting better until the economy improves. So do you feel the same way for the scoring business for you guys?

Chuck Osborne

We are making a conservative view that says the scoring business will remain at the press levels for some period of time in 2009.

Michael Nemrah – Red Brush

And then Chuck, I got a question for you. Could you tell us what you are expecting in terms of a free cash flow targets for fiscal 2008 and then roughly how we should think about free cash flow for 2009 relative to net income?

Chuck Osborne

Well, I think, number one, you would, for this year, we are pretty close that numbers that expected on targets are fourth quarter rolling average, so we might be that, actually, states sort of it at that level of the quarter that we are dropping of, the quarter that we are adding are about the same so about $136 million. And then, I would expect that to grow as we expect revenue to grow when we issued guidance for fiscal year 2009 and I think you would take that up after the increase that you see in the increase that you would see then and our expectations the revenue which will provide then. We are not expecting anything traumatic in terms of tax rate yet, on the corporate side and cutbacks and the dividends, right now, the expectations to be somewhat low.

Michael Nemrah – Red Brush

We would be safe that somewhere in the mid-single digits for now until we get the guidance.

Chuck Osborne

Until we give you further guidance, I think you also stick with whatever you have been using to preserve our revenue growth.

Michael Nemrah – Red Brush

Okay and then just one last one, could you tell us what are the prices that you received from the sale of the Insurance Bill Review Unit.

Chuck Osborne

I believe, it is about $40 million.

Michael Nemrah – Red Brush

$40 million. So was doing $40 million run rate and they got about $40 million for it.

Chuck Osborne

Right.

Michael Nemrah – Red Brush

Okay. I will let somewhat ask about our sales. Thank you very much for taking my questions.

Chuck Osborne

Thank you, Mike.

Operator

Your next question comes from the line of Kyle Evans from Stephens.

Kyle Evans – Stephens Inc.

Thanks for taking my question. Maybe we could start off with the $3.3 million threw up with Equifax and maybe a little bit more detail there on exactly what that is.

Chuck Osborne

Sure. Our relationship with all of the bureaus entails periodic audits of the royalties that they pay us – actually, monies from both directions. In the course of negotiating the recent partnership with Equifax, we determined that there was an accidental overpayment by them to us and we have agreed to reverse the $2.3 million as a result. So it’s a one time issue, nothing systemic there.

Kyle Evans – Stephens Inc.

Okay, so the longer term impact of the agreement that you reached, what is that do to the scoring economics over time?

Chuck Osborne

We haven’t characterized in any detail. I think what you’ll find is that it substantially stabilizes a business that has otherwise been in a trend decline. I thought I would limit my remarks that way, but we certainly have ambitions together with Equifax to sell more scores in our existent footprint and then to look for opportunities to sell new scores in that footprint and new scores in other marketplaces as well.

Kyle Evans – Stephens Inc.

Could you give us a progress report on your dealings with the other two bureaus?

Chuck Osborne

I am not of liberty to discuss given the litigation is pending but I would stay with my earlier comments that it’s been our desire to seek marked resolution with all participants. We are interested in making money in the marketplace when we are in litigation. So given the pending litigation, I can’t do too much more at this point.

Kyle Evans – Stephens Inc.

Okay. In the strategy machine segment, your press release, I’m a little bit confused by some of the trends that are detailed there. I can certainly understand the decline in marketing solutions in that segment, but not the decline in fraud unless that just transaction volume slowing there and definitely not – I definitely don’t understand why the collections and recovery would be down and the originations would be up. Could you help me and I can go through this again more slowly if it’ll help, but I don’t – mainly I don’t understand why collections and recovery would be down in strategy machines when others are reporting strength there and originations were up.

Chuck Osborne

Let me just comment on the transaction-based expenses Falcon Triad are clearly reflection of usage in general economic activities. These are functions of both the number of accounts that are out there open and they are being processed and accessed. With respect to Debt Manager and Collections, in some cases, this is simply the timing of transactions in this quarter versus a year ago and when we had some large transactions in ’07, yet and so relative basis that the transactions which considered top of our sales where the revenue comes in at the beginning of the contract term appear lower but I’ve suggest that mostly the timing of transactions between quarters.

Okay, I don’t really see that as a trend. Certainly, the Debt Manager is then a very popular and necessary product for us right now and our pipelines demonstrates that.

Kyle Evans – Stephens Inc.

Okay. Are you seeing zest in the marketplace trying to sell Raptor yet?

Chuck Osborne

We have seen some indications that they’ve got early customers that are evaluating. Yes.

Kyle Evans – Stephens Inc.

Though you are saying then – go after somebody besides HSBC?

Chuck Osborne

Principally, HSBC.

Kyle Evans – Stephens Inc.

But not just HSBC?

Chuck Osborne

I think they are marketing activity underway elsewhere but we’re not aware of any competitive wins apart from HSBC.

Kyle Evans – Stephens Inc.

Okay, and then lastly, then I’ll get out of the way and let somebody else talk. The reengineering that was originally supposed to take 35 million operating expenses is now going to take out 48 million in the operating expenses which are already largely taken out. I just want to make sure I understand this right. In the due, it is kind of circle then another 26 million to more facilities consolidation and more head count reduction that you are going to take out going forward.

Chuck Osborne

Exactly, our goal here has been to free up resources in the reengineering effort for reallocation to other with principally the development of our decision management product line and so we have the – we previously announced the 35 (inaudible). We were actually able to bring that number up to 48 and now we are adding another 26 with combination of what Mark indicated to all this cost and our some head count reduction which we intend to have built into our run rate by the end of this fiscal year.

Kyle Evans – Stephens Inc.

Great. Thanks. I will get back in the queue.

Chuck Osborne

Thank you, Kyle.

Operator

Your next question comes from the line of Michael Meltz from JP Morgan. Sir, your line is open.

Michael Meltz – JP Morgan

Great. Thank you. One other question on the true-up with Equifax there – you – or two questions on the true-up. You said – I think you said that the deal – the true-up is just a normal periodic audit and I understand that but you said the deal helps stabilize the business that has been turning down but – you would not comment on the economics. Can you just talk a little bit more about it, so is there is no change to the economics going forward?

Chuck Osborne

There will be change in economics. The bulk of which will occur next fiscal year so I would expect additional guidance on the next quarter’s earnings following we talk about this fiscal 2009, so we are still on ramp up period on that, but clearly the intention of that partnership is to boost our revenue as well as theirs and you will hear more about that as we go forward.

Michael Meltz – JP Morgan

Okay, but change, meaning more or less favorable to you?

Chuck Osborne

Well, I think the answer is we are trying to go up to a larger pie so while I may feel initially revenue neutral, the idea is that we saw more scores and therefore, jointly participate in a larger pie so to our mutual benefit.

Michael Meltz – JP Morgan

Okay, understood and then another – if I back out the true-up, It still looks like scoring went down about 15% in the quarter and if – can you talk a little bit about what else was pulling down that number. If I looked at the bureau’s volumes, they were probably down mid single digits. So what else is in there?

Chuck Osborne

Failed to expand, continue to experience some pricing pressure we have indicated on our PreScore line and that is – those contracts are negotiated from time and time and impact hits its campaign go forward. We’ve also seen a reduction in campaign generally for scoring. I can’t comment on whether the bureau numbers are reflected on the PreScore type activity or simply the ongoing rate for increase base on loan origination. But generally speaking, their financial institution partners have seen in that significant reduction their demands for score in reaching period. I’m sorry, go ahead.

Michael Meltz – JP Morgan

So you’re saying non bureau scores were weaker than –

Chuck Osborne

That’s right correct. The PreScore part which is the part that’s used for marketing a new demand generation, that part of the business is not significantly consistent with what your hear banks talking about in attending their own businesses.

Michael Meltz – JP Morgan

Okay and the last question from me and Kyle kind touched on this. The incremental annualized cost saving. You said you’re hoping to get to the runway by the end of the quarter. So is your guidance for the quarter incorporate any of that cost savings in the quarter.

Chuck Osborne

Yes. If we’ve metered in, you may recall that we issued guidance for the bank after the year as opposed to either quarter. Of course now, remain in it simply for the quarter but going into this quarter, we weren’t certain when certainly stock exchange charges would hit the associated fervent charges they go along with it. In case of facilities, we often at least termination charges that will impact the period and then the unknown as well as within our work force is marked indicated we’re not going to be replacing certain nutrition and to the timing of nutrition also impact. Our intention is to have that out of our – we’re going after those cost to have them out of our runway by the end of this quarter, so that we’ll get a full year impact in 2009. I would hasten to add that it is not the net, the number of we’ve cited are not the net or incremental impact. Certain amounts of that large portions of that will be reinvested in the business as I indicated into the investors that were making in the application side development in certain marketing efforts and those would be metered in as well and our guidance vote for this fourth quarter and the guidance of issue for 2009 will be reflective of the impact of those of that result.

Michael Meltz – JP Morgan

Is there any rule of thumb how we should think of what the net benefit to earning should be? So if you’re saying $26 million incremental, is that the number? Okay, but is there a certain percentage that you would hope to have flow through?

Chuck Osborne

I would not offer that right now except to indicate that the guidance that we issued in the quarter in relation to the year will be reflective of the impact of those, and mostly goes to the issue of the reinvestment. It is hard for us to gauge the timing of some of the reinvestments that involved hiring decisions, purchases of licenses are two other things that we are using within involvement and we’re giving you these numbers an indication of the efforts they were putting behind freeing up resources to investments.

Michael Meltz – JP Morgan

Thank you very much.

Chuck Osborne

Thank you.

Operator

Your next question comes from the line of Sitra Sanderman [ph] from (inaudible). Your line is o pen.

Sitra Sanderman

In your guidance for Q4, are you including any restructuring charges additional?

Chuck Osborne

Sitra I’m sorry, the last part of your question?

Sitra Sanderman

The 38 – no – whatever the outlook for the full quarter is. Just wondering if that includes some restructuring charges…

Chuck Osborne

Yes. The fourth quarter guidance of $0.38 earnings per share reflects, includes in it some restructuring charges which are generally offset by the savings of salary from the individuals that are affected, so it’s essentially a watch for the quarter. Both numbers are in that net value of $0.38.

Sitra Sanderman

But would you be able to give us an idea of how quantify what that charge would be?

Chuck Osborne

Yes. We expected to be small at this point. May be then net about $1 million to $2 million.

Sitra Sanderman

Okay. And then when we talked about the scoring business, is it possible to delineate what percentage from a volume and then from a revenue perspective? What percentage is coming from PreScore versus loan origination versus whatever other products so we can understand the impact because I think all of us have a general idea of what is the trend in the industry have been on the PreScore versus origination site.

Chuck Osborne

Sitra, your question is to what percent is our business comes from PreScore and bureau related or the impact of the managed demand by area?

Sitra Sanderman

Take it anyway you’d like. I mean, I was trying to understand from a volume perspective how much of the scoring business is coming from PreScore versus, I’m assuming, origination. And then on the revenue side, how much is coming from PreScore versus origination because I think in general, PreScore has been, as you all connect, they also pointed out down, may be 40% to 50%. Origination seems to have, may be depending on the product, head up a little bit better outside of mortgages.

Chuck Osborne

PreScore, as the percentage of our total revenue is still relatively small compared to the volume due to the bureaus and the impact perhaps on PreScore yearover-year is, say at third at the impact in total of volume. The $2.3 million adjustment for Equifax is about in round numbers similar to the PreScore impact and then our volume impact is a little over twice that.

Sitra Sanderman

Twice that?

Chuck Osborne

This is a $5 million in volumes and PreScore down about 2.5 and Equifax investment of another 2.5.

Sitra Sanderman

Okay, okay. That is actually quite – but from a margin perspective, you make more margins, I think on the origination side than you would on the PreScore side, am I right or wrong?

Chuck Osborne

Well, margins generally prescoring, it is a royalty stream, so

Sitra Sanderman

Yes.

Chuck Osborne

Generally speaking, margins are healthy across the product. Our price pointer is lower on PreScore because the volumes and purchase in quantity just like our PEP scores [ph], historical scores and the bureau channel results in online polls. Their calculations of scores batch that actually carry a contract price and we have a number of means by which the bureaus financial assistant is generally depending on the volumes of the transactions.

Sitra Sanderman

Yes, (inaudible) is right and that the margin was actually a wrong question. On the PreScore side, it sounds like the majority comes directly from the issuance of credit and not so much to the credit bureau – or that this piece been more stable than the direct of financial institution.

Chuck Osborne

It is contracted for you in both ways, it depends on the relationship between the institution and the bureaus and the casuals come by both means as well.

Sitra Sanderman

Is one bigger than the other when it comes to PreScore versus origination?

Chuck Osborne

Actually, I think it is pretty even.

Sitra Sanderman

Okay. Thank you very much.

Operator

Thank you. Mr. Michael Nemrah from Red Brush has a follow-up question. Your line is again open, sir.

Michael Nemrah – Red Brush

Thank you. Thanks for taking my follow up. Mark, can you just talk a little bit about – you are talking about a number of contracts that slipped out of this quarter end, last quarter end, and to this quarter. Can you talk about whether those of close subsequent to the start of the quarter where they were geographically and the kinds of customers they were and for which products, please.

Mark Greene

They tended to be larger multinational banks. They tended to be based in Europe and about half of those contracts have closed since the end of last quarter so we are confident that it really was a push situation and not something else going on.

Michael Nemrah – Red Brush

Okay and that was for diverse products and so there was no particular products and what they were like. They were just across the board for pretty much all the different products that you sell?

Mark Greene

Yes.

Michael Nemrah – Red Brush

Okay.

Mark Greene

In Europe generally. I was in the U.S., the emphasis is based on collection then recovery so let us try to little bit more skew in the direction and otherwise but there were mixtures across the board.

Michael Nemrah – Red Brush

Right. Do you see a kind of – do you see the light at the end of the tunnel in terms of the U.S. financial services mark, I know you said, 2009, maybe 2010 for full recovery here.

Mark Greene

Michael, you are probably in (inaudible) position as we already know. I think it is appropriate for us given the mixed (inaudible) here to take the stand that we are taking which is to be prepared for a slow recovery that does not look for now before late 2009 (inaudible). I would love to be pleasantly surprised but the – and I do not have the great certainty about our predictions here but we are taking the stand that we need to be able to hit our numbers and manage the company through for another 12, perhaps 18 months here today.

Michael Nemrah – Red Brush

Chuck, just the head count, just a housekeeping question there, what it was at the end of the quarter and could you tell us, maybe break it down by unit as well, sales marketing versus G&A.

Mark Greene

I have 2600 in total and I do not have the break out between sales marketing. Give me a second, I will get it for you.

Michael Nemrah – Red Brush

Sure, and just one other question, you – obviously, you are talking about this – you talk about continuing operations and the release, can you tell us what the status is or maybe have John give us an update on the status of the other operations or units that you’re looking to invest. Should we expect more activity over the next couple of months within the next year and let the environment is like out there for some. It’s that to [ph]?

Mark Greene

Yes the remaining units relatively small and we’ve got some transactions scheduled out that will not have significant impact on our financials. As for the environment, our assets are still specialized at it. I would be perhaps misleading in characterizing the reception we’re receiving a new one uses a very specialized interest in for example [ph] Asset. We’re parting web. Sometimes were doing it with management or their aligning themselves with the central buyers. It’s helpful so it's hard to characterize.

Michael Nemrah – Red Brush

Thanks for taking my follow-up questions. Thank you.

Operator

We have another follow up from Mr. Kyle Evans from Stephens. Your line again is open sir.

Kyle Evans – Stephens Inc.

Thanks Mark. At your analysis today, it sounded like you were pretty confident you were through with the worst of the pricing pressure on the Pre Score business. Has that proven out been the case?

Chuck Osborne

I think so,. The main emphasis this quarter was volume as we talked about much less on pricing.

Kyle Evans – Stephens Inc.

Okay and just checking on follow up on [ph] question. One makes sure I got this right. 2.5 million year-over-year decline in PreScore, 2.3 on the true-up and the rest of it is volume?

Chuck Osborne

That’s correct.

Kyle Evans – Stephens Inc.

Okay and specifically. The volume in PreScore you mentioned that was a pretty significant drive and we’ve seen that at the bureau has kind 25%, 40% off year-over-year. What was your decline?

Chuck Osborne

Right. Okay I don’t like it to characterize that way at the end of premium looking at total dollars and with the combination of that Kyle.

Kyle Evans – Stephens Inc.

I guess following thought with you. This is not business has gone away forever. Right. You can tell a story that under which if this business comes back. The pressure is timing.

Chuck Osborne

But we’re not operating on the assumption that PreScore is gone. Never to return.

Kyle Evans – Stephens Inc.

But the pricing that you gave up doesn’t come back when the business does? Necessarily.

Chuck Osborne

That maybe the case. So we are probably looking at pricing levels that remain about where they are now. The volumes eventually come back.

Kyle Evans – Stephens Inc.

Okay and lastly to follow up on one of Michael’s questions. You mentioned that you are kind of looking at our revenue neutral impact from the exact agreement in fiscal '09, but you didn’t mention anything about margin. Should that also be neutral?

Chuck Osborne

I would say so. The margin for this business is a royalty stream; it is very healthy, so the impact on this agreement is intended to be neutral going forward in the immediate term and then as Mark indicated, will give us opportunity for a new sale together, both to this called new product.

Kyle Evans – Stephens Inc.

But is it only margin-neutral going forward if you get incremental new product and new sales as a result of the agreement?

Chuck Osborne

No. I would say it was geared to be neutral form the offset.

Kyle Evans – Stephens Inc.

Okay, thank you.

Chuck Osborne

Let me just follow up on Michael’s question on headcount. The 2600 remains and about 380 of those people were (inaudible).

Operator

Your next question comes from the one of Nate Otis from KBW. Your line is open, sir.

Nate Otis – KBW

Rehash again, but I just want to take a second again and understand the true – I am just having a little bit of difficulty between what your statement on the call saying that it was pretty much periodic over payment throughout and in the prosper, we were talking about a one time charge relating to the agreement with Equifax just seem a little different and I just wonder if there is any more color you could provide. I would appreciate it.

Chuck Osborne

There is a same thing and I apologize for the confusion. This error which was in anyway narrow on both parts was discovered as we negotiated with Equifax around the new partnership. So, the partnership discussion’s triggered a review of financial records which surfaced a one time miscalculation that we’ve now chewed up. So, it’s not a feature of the partnership, it was discovered in the process of negotiating the price.

Nate Otis – KBW

I thank you for your help. Thank you. Next question, last, where you, you talked about possibly buying back about a million shares a quarter for the rest of the year, it looks like you were a little shy about this quarter. Any reason for that and any expectation that we can have in the fourth quarter?

Chuck Osborne

As we were negotiating our agreement with Equifax, we decided that we make a lot of time thrusting the market place. We’re concerned about the appearance of that later until we backed away.

Nate Otis – KBW

Okay. And then just last question, do you have a, what the currency impact was on revenues this quarter?

Chuck Osborne

Just a slight increase. It’s just positive slightly. We had to a lot of this.

John Emerick

Hey, it’s John Emerick. Under $100,000.

Nate Otis – KBW

Okay. All right. Thank you.

Operator

And there’s no more questions, thank you.

Mark Greene

Thank you all for joining. Thank you, operator.

Operator

You’re very welcome. This now concludes your Fair Isaac Corporation Q3 earnings release. You may now disconnect.

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