And thank you for joining
FICO's 3rd quarter earnings call. I'm Steve Weber, Vice President of Investor Relations and I'm joined today by our CEO, Will Lansing and our CFO, Mike Peng. Today, we issued a press release that describes financial results compared to the prior year. On this call, management will also discuss results in comparison to the prior quarter in order to facilitate understanding of the run rate of our business. Certain statements made in this presentation may be characterized as forward looking under the Private Securities Litigation Reform Act of 1995.
Those statements involve many uncertainties that could cause actual results to differ materially. Information concerning these uncertainties is contained in the company's filings with the SEC, in particular in the Risk Factors and Forward Looking Statements portions of such filings. Copies are available from the SEC, from the FIFO website or from our Investor Relations team. This call will also include statements regarding certain non GAAP financial measures. Please refer to the company's earnings release and Regulation G schedule issued today for a reconciliation of each of these non GAAP financial measures to the most comparable GAAP measure.
The earnings release and Regulation G schedule are available on the Investor Relations page of the company's website atfico.com or on the SEC's website atsec.gov. A replay of this webcast will be available through July 31, 2018. Now, I'll turn the call over to Will Lansing.
Thank you for joining us for our Q3 earnings call. We delivered another solid performance in our Q3, and I'm increasingly confident in our ability to deliver on our full year guidance. In our Q3, we reported revenues of $231,000,000 $25,000,000 of GAAP net income and GAAP earnings of $0.78 per share. We delivered $37,000,000 of non GAAP net income and non GAAP EPS of $1.16 We had a very good bookings quarter with $95,000,000 in deals. That's a 21% increase over the same period last year.
And the $35,000,000 in transactions bookings this quarter is a 64% increase over last year. This means we're building more recurring revenue streams that will be realized in future periods. We continue to pursue and sign more and bigger deals.
In fact, this
was the 3rd straight quarter with bookings of more than $90,000,000 dollars In our software businesses, revenues were down from last year due to fewer upfront license deals. This is primarily a timing issue and one of the reasons that we give full year instead quarterly guidance. The lumpiness of the license sales can overshadow the underlying recurring revenue, which has been growing nicely. Our bookings were balanced across many of our key product lines, including fraud, originations manager and our decision management platform. We continue to see more of our pipeline and bookings related to cloud deals.
One notable deal this quarter was one of our cyber security offerings, where we signed our first seven figure deal for our enterprise security score. The deal was with a provider of IT solutions, including cybersecurity services for hospitals and others in the health care space. We are still in the early stages with this product, but we are excited about our technology and the opportunities to help our customers protect themselves and their consumers. The big story this quarter is our Scores business, where we continue to make significant progress on our strategic initiatives and are adding new revenue sources to our B2C business. We drove solid growth throughout Scores with total revenues up 14% versus the prior year.
B2B revenues were up 13% for the quarter as we continue to see strong volume trends. Our B2C revenues were up 16% this quarter versus last year. On the B2B side, we had very strong volumes as the demand for FICO scores in the U. S. Continues to grow.
1 of the fastest areas of growth is FinTech well as new verticals like telco. We also had some exciting developments on the B2B side this quarter. A top 10 bank went live with our FICO score XD, a product to score the previously unscorable. And we're seeing our first revenue from our global financial inclusion initiative with usage in China. Neither XD nor financial inclusion will have a material impact this year, but both can provide growth in fiscal 2018 and beyond.
As I've said for the last several quarters, we have a lot going on in our Consumer Scores business. We are continuing to find new ways to monetize FICO scores, the scores that are used by lenders, and products marketed to consumers. Those scores are a significant component in paid credit monitoring and identity theft protection products like those sold at myfico.com and through our partnership with Experian. We are pursuing the white label affinity market with deals like we signed last quarter. We've entered the lead gen space with deals that have gone live over the past several months, and we just signed another lead gen deal with a large card issuer that we'll be rolling out in the coming months.
Finally, we are now seeing demand for more content from banks that have rolled out the highly successful open access program. As a result, we've recently signed deals with 2 different issuers to provide additional educational information for consumers. These new deals will likely have little impact in the last 3 months for our fiscal year, but they will provide important recurring backlog as we enter fiscal 2018. As always, we remain focused on driving shareholder value. We are actively managing our expenses and generating significant free cash flow.
That discipline has allowed us to repurchase $140,000,000 in shares so far this year. I'm pleased with the progress we're making executing on our strategy, and I believe that we're well positioned as we finish our year and look ahead to 2018. I'll share some summary thoughts later, but now I'd like to turn the call over to Mike for further financial details.
Thanks, Will, and good afternoon, everyone. Today, I'll emphasize 3 points in my prepared comments. First, we delivered $231,000,000 of revenue this quarter, with recurring revenue up 8% from last year, which was partially offset by a large decline in upfront license revenue. Revenue of $679,000,000 year to date is up 5% from last year, again driven by a 7% increase in recurring revenue. 2nd, we delivered $25,000,000 of GAAP net income this quarter $88,000,000 year to date and are on track to delivering our guidance.
Finally, we had $67,000,000 of free cash flow this quarter and $155,000,000 year to date. We used $46,000,000 to repurchase shares and have spent $140,000,000 on repurchases this fiscal year. I'll begin by breaking the revenue down into our 3 reporting segments. Starting with applications, revenues were $134,000,000 down 5% versus the same period last year, which had record license sales. We had strong revenue quarter in our customer communication services and compliance product lines.
Year to date applications are up 5% over last year, primarily driven by growth in recurring revenue. We had a very strong bookings quarter in applications with $62,000,000 of deals, up 26% from last year. In the Decision Management Software segment, revenues were $28,000,000 down 23% from the prior year. The decline was due to lower upfront license sales, primarily Blaze Advisor. Bookings continue to be strong in this segment at $21,000,000 Year to date bookings are $70,000,000 up 29% over last year.
And finally, in our Scores segment, revenues were about $70,000,000 up 14% from the same period last year. On the B2B side, we're up 13% versus last year. The B2C revenues were up 16% from the same quarter last year. As Will stated, we have a number of Scores initiatives coming online that will further propel growth in this space. Looking at revenue by region, this quarter, 74% of total revenues were derived from the Americas.
Our EMEA region generated 17% and the remaining 9% was from Asia Pacific. Recurring revenues derived from transactional and maintenance sources for the quarter represented 72 percent of total revenue. Consulting and implementation revenues were 19% and license revenues were 9% of total. We expect license revenue to increase in quarter 4 due to a combination of new deals with upfront revenue and some expected license renewals. Bookings this quarter were $95,000,000 up 21% from the prior year quarter.
We generated $19,000,000 of current period revenue on those bookings for a yield of 19%. The weighted average term for our bookings was 29 months this quarter. We continue to book more large deals. This quarter, we had 14 deals over $1,000,000 and we booked 3 deals over $3,000,000 Cloud bookings were $15,000,000 for the quarter $41,000,000 year to date or 14% of total. Operating expenses totaled $190,000,000 this quarter compared to $188,000,000 last quarter.
This included a $4,000,000 restructuring charge as we reallocated some of our resources towards our highest strategic priorities. We expect our 4th quarter expense to be slightly lower than our 3rd quarter. As you can see in our Rig G schedule, our non GAAP operating margin was 28% for the 2nd quarter and 26% year to date. We expect the full year operating margin to be between 26% to 28%. GAAP net income was $25,000,000 and included a reduction to income tax expense of just under $3,000,000 or $0.08 per share associated with the adoption of FASB Accounting Standards Update 20sixteen-nine.
Adjusting for that impact, the effective tax rate was about 36% due to increased profits in higher tax jurisdictions. Non GAAP net income was $37,000,000 for the quarter. We expect our actual tax rate to be 17% to 18% for the full year, which includes the impact of the new accounting standard. Free cash flow for the quarter was $67,000,000 versus $80,000,000 in the prior year. And for the 1st 3 quarters of the fiscal year, free cash flow was $155,000,000 Turning to the balance sheet, we had $131,000,000 of cash on the balance sheet at the end of the quarter.
Our total debt is $612,000,000 with a weighted average interest rate of 4.3 percent and the ratio of total net debt to adjusted EBITDA this quarter is 2.1 times, well below the covenant level of 3 times. We expanded our revolver this quarter, increasing our capacity to $500,000,000 and have used this to refinance the $72,000,000 in notes that matured in July. We expect to refinance our total debt sometime in fiscal 2018. During the quarter, we returned $46,000,000 in excess cash to our investors, repurchasing 340,000 shares at an average price of $134.92 In addition, we repurchased another 140,000 shares for $20,000,000 in July, leaving about $90,000,000 remaining on the total Board authorization. And we continue to view share repurchases as an attractive use of our cash.
We also continue to actively evaluate opportunities to acquire relevant technologies and products that advance our strategy our portfolio and competitive position. Finally, we're updating our previously provided guidance to adjust for the Q3 impact of the new accounting standard. We are now guiding the full fiscal 2017 as follows. Revenues remain at approximately $925,000,000 GAAP net income previously guided at $130,000,000 is now adjusted by the 3rd quarter excess tax benefit to a new total of approximately $133,000,000 GAAP earnings per share previously guided at $4.03 is now approximately $4.11 Non GAAP net income remains unchanged at $158,000,000 and non GAAP EPS is unchanged at $4.92 With that, I'll turn it back over to Will.
Thanks, Mike.
Next quarter, we'll talk about our expectations for 2018. But for now, I'd like to review what we've been able to accomplish in 2017. In Scores, we're making significant progress in leveraging our B2B leadership into the consumer market. We're signing deals and are looking forward to seeing further steady sustainable growth. On the software side, our SaaS enabled products and decision management suite technology are gaining traction and opening new markets.
The bookings we are now signing are building substantial future recurring revenue flows. We are well positioned for 2018 and beyond. We have extraordinarily valuable IP, a long heritage of our analytic prowess and a very talented team to make the most of our opportunities. I'll turn the call back to Steve now for Q and A.
Thanks, Will. This concludes our prepared remarks and we're ready now to take your questions. Operator, please open the line.
Certainly. Certainly. Our first question comes from the line of Manav Patnaik with Barclays. Please go ahead. Yes.
Thank you. Good evening, gentlemen. It looks like you explained a lot of the I guess your numbers relative to what we had as timing differences around license deals and so forth. Maybe ask another way in terms of your segment expectations for the full year, particularly maybe on the D and S side, like what should we think what that should look like? Is one doing better than the new expectations and one less so?
Maybe just maybe some color there would be helpful.
Yes. Manav, this is Mike. So as the year is shaping up, I would call it the following. So scores and our applications business are probably exceeding where we thought they would be in terms of top line revenue. And I would say DMS is falling below where we thought it would be on top line revenue, but in line maybe a little bit better on bookings.
Okay. And then maybe could you just elaborate on DMS then, like what's going on there? Is it because I think you guys are obviously hiring salespeople to help with that effort. There was a lot of positive talk on it through the year. So is it just timing or is there something else going on there?
Manav, I would say it's just timing. We're as excited about DMS as we've ever been. We are putting a ton of resources into DMS, not just in sales, but across the board. All of the R and D activity is really pointed in that direction. And so it's kind of a question of when it happens, but we're actually highly confident about the future of DMS.
Yes. Manav said in another way, it's all upfront software. Basically that is the shortfall in that area and that's offset by the transactional volume increases in Scores and in the apps part of our business.
Okay, got it. And then just one more on the Scores side. Can you maybe give a little bit more color on the backlog you're talking about going into '18? And maybe just some perspective on the lead gen initiative you have going on with Xperience, like, Xperience, would you say that's sort of I think they just launched that effort obviously recently. So how should we think about the runway left there?
To answer the second one first, with respect to the lead gen, we really rely heavily on our partner Experian and the timing of their efforts there. We are very much joined with them in partnership and advancing it and we're really happy with the value proposition, which is clearly the strongest value proposition in the market. As we've discussed in
the past,
in addition to providing the genuine FICO score to consumers, which is a substantial improvement over what all the competitors do, We also take into account the lenders' lending criteria and match that carefully with what we know about the consumers who come. And so the breakage in terms of the lead gen is much, much lower than with competitors. And so we're feeling really good about the value proposition and it's just been launched. And so time will tell how that performs. And so we have high expectations for 2018, obviously, but it depends on kind of how things go there.
And then on that we mentioned backlog with respect to FICO Score XD and some of the other initiatives that are just getting started right now. So there no significant revenue to show for them right now, but we're feeling good about the future of those. And again, we'll see how the market takes them, but the early results are promising.
All right. Thanks, guys.
Our next question comes from the line of Bill Warmington with Wells Fargo. Please proceed with your question.
Good afternoon, everyone.
Hey, Bill. Hey, Bill.
So the first question I had was on the B2C Scores business, the new education scores you referenced. Maybe give us a little more color on how those work, what the revenue model is?
Yes, Bill, this is Mike. So what we did this quarter is we announced a couple of new deals where an existing open access customer of ours, a bank, is going to be adding additional features to their offering for their consumers, basically expanding additional educational information into the offering beyond what they get with the open access program. Those features and information to that degree that helps the consumer understand their credit position more thoroughly are paid for by the bank to FICO, but are provided as part of the relationship that the bank has with its customer. Those deals were signed. We really didn't claim anything, if you will, from that at this point.
That will be kind of ratable revenue as it rolls out across the open access platforms.
So when do you expect that to actually go live at the banks?
It will differ from bank to bank in terms of how quickly they roll it out across their portfolio. So I can't give you like a specific date, but I'm imagining it will start to feather in beginning here in our Q4 and more importantly into the winter months.
Got it. And then on the I wanted to ask also about the cybersecurity score that sounded like a sort of a proof of concept win, if you will. Maybe you can give us a little more detail in terms of what the revenue model is there and how you think about the revenue opportunity?
Yes. So this is kind of a basic reseller for us. It's, as we said in our prepared remarks, a health care provider, IT provider to the health care industry. And they offer a number of products, including now, some additional cyber products, the ESS score from FICO, and they'll be selling it to their end customers. The way the economics work for us essentially is that the fee that will be charged to the health care provider by this reseller of ours will be based on their number of endpoints, number of points like computer terminals or phone terminals or whatnot.
They're commonly called endpoints. And there's a grid that they pay based upon the number of endpoints and the number of employees the end customer has. And we do a very simple revenue share with the reseller. They keep a piece and they pay us a piece for that.
Got it. And so on the implied EPS guidance for Q4, I just wanted to check something with you. Last year was kind of an unusual year and that Q3 was as strong as it was and pulled some revenue forward from Q4. If I go back 2014, 2015, it looked like the sequential increase from Q3 to Q4 was running nite to 55% to 60% range. So are you is that is the conclusion there that basically 2006 was an aberration and now you're returning to more of the seasonal pattern that you've had in prior years?
Is that the message?
You could definitely take that away from the way the numbers are falling out. But I would just say that we're just we don't focus that carefully quarter to quarter. The truth is that we really think about our business on kind of an annual run rate basis. And we get near the end of the quarter and of course everyone in this company is scrambling to try to deliver revenue for by quarter end. We're a software company like every other software company.
But the place where we're not like every other software company is, it is rare that we want to provide incremental discount or make concessions in order to rush the revenue into the quarter. And so we do wind up in situations where these deals, which are increasingly complex and take longer to sort out, slide from 1 quarter to the next. And so this year, I think that, that conclusion that you've drawn is accurate. And I would just say in general, the revenue comes when it comes. We try to bring it in, we try to bring in kind of a rational way.
And we don't rush it. We take our time to do it right.
Okay. And one more question, if I might, on the Experian relationship. On their call, they had mentioned the strength on both the identity protection side and the lead gen product side. And they had mentioned that they were in the process of rolling that out more aggressively during the September quarter. And they made some comments around the Experian website seeing traffic that was converting well and that the revenue generation on those leads was very strong.
And so my question is, do we see some of the benefit of that flowing through already in the June quarter? Or is that really going to be coming in more of the September quarter and beyond?
Not really in the past, in the current and more in the future. But as go their fortunes, so go ours. That is accurate.
Okay. All right. Well, thank you very much.
Our next question comes from the line of Brett Huff with Stephens. Please proceed with your question.
Thank you. Congrats on a nice bookings quarter. One question that I had on guidance, just want to make sure that I understand it. I know that you guys don't discount and I think holding firm on price is obviously a really good thing. But knowing what we know now, do we need to be thinking about deals that might slip for the full year on that $925,000,000 revenue any more than they any more risk there than they normally might have just based on what you're seeing?
No, I would say, Brett, that the reason we confirm guidance at 9.25% is that's what we feel pretty good about and I think that's what we should focus on.
Okay, thanks. And then the Open Access cross sale of the additional value added product sounds really interesting. Have you kind of contemplated or shared at all what kind of penetration you might think you think you might be able to get of those banks that use Open Access or sort of size that for us? Because I know Open Access doesn't officially generate revenue, but I think it does increase score usage sort of indirectly. This seems like the first sort of more direct revenue from that and given the broad adoption of open access, how do we how do you guys think about that in terms of size of opportunity?
Yeah, great question, Brad. And I'm glad you gave us an opportunity to kind of clarify. So as you noted, we don't charge for open access and it's very much designed to be available to consumers with no charge. Of course, it was our hope always that financial institutions would be interested in sharing more about credit, more about the FICO score, more about consumer capabilities and capacities and how to influence those things. And it was our hope that we would be able to monetize them.
The most aggressive form of that monetization comes in the form of partner experience. And the question has always been, which direction the financial institutions would go? Would they favor kind of the paid offerings and the fee income that comes with that? Or would they treat it as more of a customer strength customer relationship strengthening, free content kind of a thing. And it was never really clear which way the market was going to evolve.
And I think what we see is both, But we're pleasantly pleased with the market receptivity to the idea of increasing content for consumers for free because it means that they go out to all of their consumers, not just a subset. And we do think that the kind of raising awareness about FICO scores that has occurred because of Open Access is getting the banks into a mode of thinking how do they provide more credit content and FICO credit simulator and so on to all of our customers and we're obviously working with them on that.
Great. That's helpful. And then last one from me. You talked a little bit about the DMS deals in the pipeline and the bookings were good. I know we had the big telco deal and that seems to be going well.
And I think you said that you thought that was kind of a repeatable product in that industry. Based on how good the bookings are, is there a pattern emerging in terms of what verticals are most assimilating this product? Or are there specific use cases that are sort of emerging as the killer app? Any trends there yet?
I think that the most natural candidates beyond financial institutions that are interested in our IP and in our offerings are customers that have a large consumer base and a billing relationship. They have some kind of customer acquisition activity that resembles originations. They have a customer management activity that resembles what we do at Triad with banks. They have billing and receivables that they have to manage with consumers that cause them to have a need for collections and recovery just like banks do. And if they're involved with transactions, they obviously have an interest in fraud detection.
And so when you look at the kind of key IP that we provide to banks, where we're best in class for banks, you have other verticals that are focused on these same activities, telcos, utilities, cable companies and power companies. I mean, there's a very natural play there. And so in the fullness of time, we anticipate growth in those verticals. But those aren't the only ones. Obviously, it goes beyond that.
It goes to retailers and online e commerce retailers too. So pattern emerging is the easiest way to predict it is to say what is it that we do well for the financial institution that we serve today and who has the most natural need for the same kind of thing. And we are seeing success with that.
Great. Thank you for your time.
Our next question comes from the line of Adam Klauber with William Blair. Please go ahead.
Thanks. Good afternoon. 1 or 2 questions. First one on expense and margin, as you've sort of let us know that over the last year or so, you had the step up in expenses as you've been investing in sales and infrastructure. I guess going forward, are there any initiatives that would cause a major step up as we look forward over the near term, the next 12 months?
And if not, is it possible that 2018 could be more margin accretive than 2017?
That's a great question, Adam. So there's no particular categories that are looking like big step up in expenses in the near term in the near and intermediate term, and I can't speak to the long term. But certainly, in the near future, we don't see anything that would be a big uptick. In terms of margin expansion, this is what we wrestle with every day. We're in 2018 planning cycle right now, and we're wrestling with how much to increase margin and how much to reinvest in the business.
And it is frankly a choice. There's certainly margin that could flow through in terms of margin expansion should we choose to do that. And if we decide to not do that a lot or not do it at all, it will be because the investment opportunities are quite compelling. And so that you've caught us a little bit early in the planning cycle. We haven't given guidance for 2018 yet.
I'm fairly confident that we're looking at neutral to improved margin for next year, not a shrinkage, but how much margin expansion remains to be determined.
Okay. Thanks. That's helpful. And then on the Scores, B2B growth, I'm sorry if you mentioned this before, was pretty strong. What was driving that this quarter?
Adam, a lot of it was volume. We've had good volume increases with some of the big banks, especially on the prescreen side. We also are picking up volume through FinTech and some telco providers, call that new volume for us. And then there was a little bit of price increase in there from some of the smaller lenders that all netted into the number.
Okay. Thanks.
And then as far as the XT effort, again, great news that the first one is coming through. Are there a couple others near the finish line or is it more one is going to jump in and then the others maybe take a look and maybe eventually jump in?
It's really up to the financial institution when they want to deploy in production. So typically the rhythm is that they take it in house, they evaluate it, they decide that it's interesting because it scores a population they don't otherwise score. They decide to test it for a period of time and then they make a go, no go decision. So far, no one has ever said no go. So far, we're in the introduction, the education and the testing mode.
We've got one that's decided to go live, one big one trying to go live, and we expect that there will be others that follow. But we're still in that getting to know the score and evaluate it phase.
Okay. That's helpful. Thanks.
There are no further questions at this time. I will now turn the call back to the presenters.
Okay. That concludes today's call. Thank you all for joining us.