Fair Isaac reports profit rise in Q2

Second Quarter Fiscal 2005 Results

The company reported second quarter revenues of $196.0 million in fiscal 2005 versus $173.2 million reported in the prior year period. Net income for the second quarter of fiscal 2005 totaled $34.3 million, or $0.45 per diluted share, compared with net income of $30.8 million, or $0.39 per diluted share, reported in the same quarter last year. Net income for the second quarter of 2005 included an adjustment that reduced income tax expense by $6.0 million, or $0.08 per diluted share. This adjustment resulted from revisions made to estimates of prior years' tax liabilities.

The impact of the adoption of EITF Issue No. 04-8, The Effect of Contingently Convertible Instruments on Diluted Earnings Per Share (EITF Issue No. 04-8), including the costs associated with the exchange offer, reduced the second quarter diluted earnings per share by $0.05 in fiscal 2005 and $0.03 in fiscal 2004.

Fiscal 2005 Year-to-date Results

The company reported revenues of $391.6 million year-to-date versus $342.6 million reported in the same period last year. Year-to-date net income totaled $62.2 million, or $0.82 per diluted share, compared with net income of $59.6 million, or $0.75 per diluted share, reported in the same period last year. Year-to-date net income was also affected by the second quarter adjustment that reduced income tax expense as described above.

The impact of the adoption of EITF Issue No. 04-8 reduced the year-to-date diluted earnings per share by $0.08 in fiscal 2005 and $0.06 in fiscal 2004.

"We are pleased with our record earnings and bookings for the quarter," said Thomas Grudnowski, Fair Isaac's chief executive officer. "The strong bookings and sales pipeline demonstrates the success of our increased sales efforts in the core, high-margin market segments."

Senior Convertible Notes

During the first quarter, the company adopted EITF Issue No. 04-8 related to its $400 million of Senior Convertible Notes ("old notes"). In the second quarter, the company commenced an offer to exchange its old notes for new Senior Convertible Notes ("new notes") that, upon conversion, would pay the holder cash for the principal amount and cash or common stock for any conversion value in excess of the principal amount. On March 31, 2005, the company successfully completed its exchange offer for approximately 99.9% of the principal amount of the old notes. The new notes are currently not dilutive to the company's diluted earnings per share calculation.

Second Quarter Fiscal 2005 Revenues and Bookings Highlights

Revenues increased across each of the company's four operating segments. Strategy Machine Solutions revenues increased to $111.3 million in the second quarter of 2005 from $103.6 million in the prior year quarter, or by 7%, primarily due to revenues generated by collections and recovery solutions, and mortgage banking solutions associated with the acquisition of London Bridge and increased revenues from fraud solutions products. These gains were partially offset by a decline in revenues associated with marketing services, and insurance and healthcare solutions. Scoring Solutions revenues increased to $39.3 million in the second quarter from $33.7 million in the prior year quarter, or by 17%, primarily due to an increase in revenues derived from risk scoring services at the credit reporting agencies. Professional Services revenues increased to $33.6 million in the second quarter from $24.6 million in the prior year quarter, or by 36%, due to the acquisition of London Bridge and Braun Consulting, Inc. Analytic Software Tools revenues increased to $11.8 million in the second quarter from $11.3 million in the prior year quarter, or by 4%, due to revenues generated by sales from the Enterprise Decision Management suite of products, primarily due to the acquisition of London Bridge.

The company achieved new bookings of $136.6 million in the second quarter of 2005, as compared to its previous guidance of $125.0 million. The company defines a "new booking" as estimated future contractual revenues, including agreements with perpetual, multi-year and annual terms. Management regards the volume of new bookings achieved, among other factors, as an important indicator of future revenues, but they are not comparable to, nor should they be substituted for, an analysis of the company's revenues.

Balance Sheet and Cash Flow Highlights

Cash and cash equivalents, and marketable security investments were $368.3 million at March 31, 2005 as compared to $364.3 million at September 30, 2004. Significant changes in cash and cash equivalents from September 30, 2004 include cash provided by operations of $119.6 million. Cash used year-to-date includes $10.0 million related to purchases of property and equipment, $33.8 million (net of cash acquired) related to the November 2004 acquisition of Braun Consulting, Inc., and $127.0 million to repurchase company stock under its share repurchase plan. In addition to operating cash flows, cash was also generated from the November 2004 sale of the company's subsidiary, London Bridge Phoenix Software, Inc., for $22.7 million and $27.4 million received from the exercise of stock options and stock issued.

Outlook

The company expects revenue for the third quarter of fiscal 2005 of approximately $205.0 million and earnings per diluted share of about $0.44. The company also expects fiscal 2005 total revenue of approximately $811.0 million and earnings per diluted share of about $1.80. This guidance reflects the continuation of top-line growth in its core market segments and further expansion of its operating margin.

"We are encouraged by our continuing growth in key market segments," said Grudnowski. "Our above plan growth in sales and operating earnings from these segments drives our expectations for full-year, record sales and earnings. The growing demand for our analytic solutions in these core segments demonstrates the critical value we deliver to our customers and their business success."