Greetings, and welcome to the FLICO Quarterly Earnings Call. I'd now like to turn the call over to Steve Weber. Please go ahead.
Thank you. Good afternoon, everyone, and thank you for joining FICO's 2nd 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 McLaughlin. 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 may involve many uncertainties that could cause actual results to differ materially. Materially. Information concerning these uncertainties is contained in the company's filings with the SEC, in particular, the risk factors and forward looking statements portions of such filings. Copies are available from the SEC, from the FICO 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 a reconciliation of each of these non GAAP financial measures compared 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 April 29, 2021. And now, I'll turn the call over to Will Lansing.
Thanks, Steve, and thank you, everyone, for joining us for our Q2 earnings call. First, I hope you and your families are healthy and staying safe as we go through this pandemic. As we all know, these are unprecedented times. No one can predict with any certainty the scale or length of disruption from COVID-nineteen or how severe the economic and health impacts will be. The many unknowns include the scope and effect of further public health responses as well as governmental, regulatory, fiscal and monetary policies.
As we usually do, we posted some slides with our results on the Investor Relations section of our website. I'll be referencing a few of those today during our presentation. Today, I'll go over the results of our 2nd fiscal quarter and first half of the year, then I'll talk about how we're viewing our business in light of the current situation and how we plan to execute on a plan to remain strong while preparing for the opportunities when this crisis In fact, nearly all of our 4,000 person global workforce, are currently working from home. We responded early, closing our China offices in February, and we followed the lead of local, state and national authorities in 43 offices in 32 different countries. I'd like to take this opportunity to thank all of our employees who've responded to the quickly unfolding circumstances and have allowed us to adjust to ensure that key internal and client project deliverables remain on track.
We were well prepared to move to this model. Over the last year, we've increased our usage of video based communication. Before the pandemic, it was a valuable tool to drive collaboration and reduce travel. It's now a critical business practice. Our technology team had already built a robust VPN infrastructure that permits remote access to secured networks and servers.
That infrastructure and our cloud based solutions and support has meant that we are able to serve our customers without any significant loss of productivity. And as always, our cybersecurity team has been focused on protecting customers' environments and sensitive data. It hasn't been easy. There are uncertain stressful times for everyone. But I'm proud of the business continuity efforts we've undertaken to prepare for potential issues, whatever they may be, and how those efforts have paid extraordinary dividends as we are able to adapt to the challenges we face.
Finally, we've established an internal coronavirus response team. These are all examples of a resilient culture of dedicated professionals who are stepping up to the daily challenges we face. So I'm pleased to report that we had a very strong second fiscal quarter. We reported revenues of $308,000,000 an increase of 11% over the same period last year. We delivered $58,000,000 of GAAP net income and GAAP earnings of $1.94 per share.
We delivered $64,000,000 of non GAAP net income and non GAAP EPS of $2.14 This fact that we began to experience COVID related in spite of the fact that we've begun to experience the COVID related disruption in late March. We were able to generate $84,000,000 in new bookings, which is impressive considering that most of our deals closed at the end of the quarter, right when businesses were closing and everyone's transitioning to work from home. We continue to have a strong pipeline and believe many of our solutions are exactly what our customers are looking for as they focus on risk management. Our software revenue was up a modest 3% this quarter. Applications were down 1% as we had fewer upfront license sales and less services revenue than last year.
Decision Management software was up 20% with increases in both license sales and transactional revenue from deals we've signed in in previous quarters. In the Scores business, we had another great quarter due to special pricing that began to take effect. Total revenues were up 24% versus the prior year and totaled $129,000,000 On the B2B side, revenues were up 27% over the same period as last year. B2C revenues were up 15% this quarter. Scores, particularly B2B, is also an area of risk during volatile economic times as some of those revenues are tied to things like originations of new loans.
The strength of our business and our conservative financial practices have allowed us to build a healthy balance sheet. As you can see on Slide 4, we have ample liquidity and borrowing capacity. But as we look ahead, it's impossible to fully understand what the possible impact to our markets will be and to predict when the economy will improve. Because of these uncertainties, we are retracting our full year guidance. I'd like to direct you to Slide 5 to remind everyone what our original guidance was, where we stand now halfway through the year, what we would need to do in the back half to achieve those original numbers.
In this further transparency, this slide provides more details of our guidance than what we've previously disclosed, including more granularity around revenues. The red highlights areas of potential higher risk in the coming months. With B2B Scores, as I said, it's difficult for us to accurately forecast what will happen with volumes in the near term. Because the scores are sold through bureaus that report certain arrears, we don't have visibility to real time data. In times of disruption, this is especially difficult until we can begin to see the trends in the data.
We anecdotally know that mortgage volumes have been strong and auto has been weak, but it's difficult to quantify what's happening today, let alone the next several months. On the software side, we have a great deal of visibility into our transactional and maintenance revenue streams and believe those revenues to be very resilient. It's more difficult to estimate how many deals we'll be able to close and what potential impact that would have on license and service revenue. We know that we have a strong pipeline of deals fully expect to close many of them, but there's clearly more uncertainty than there was a few months ago. We also believe that we'll spend less than originally planned.
We will likely see savings in some revenue based expenses and we'll spend less on travel and marketing and other discretionary areas. We are scrutinizing our expenses more than ever, and we're committed to being as efficient as possible. In short, we don't know the severity or duration of disruptions in credit markets or technology purchases. Declines in Scores volume will have a negative impact on our revenues despite the special pricing that we start to see this quarter, but it's difficult to know for instance if declines in auto sales now create a backlog of buyers in the fall or if it is part of a longer downturn. And while sales cycles for our solutions will likely be longer, we don't yet know how much is due to customers reassessing purchases versus the logistical challenges of remote selling.
That said, we remain confident in our business model. We've got a great start to the year. We have a large amount of recurring revenue. While we expect our software revenues in the second half of the year to be lower than our guidance due to C19, we also expect expenses to decline due primarily to reduce sales and marketing expense and employee travel. These expense reductions will mitigate the impact on our bottom line.
And we expect to have other operating expense savings due to general disruption. So even though top line volatility is difficult to predict, we could still meet our original bottom line guidance if a number of factors play out. These are exceptionally volatile times, but we remain optimistic and are actively managing the business to bridge the short term difficulties while building long term value. Share some summary thoughts later, but now I'd like to turn the call over to Mike for further financial detail.
Thanks, Will, and good afternoon, everyone. As usual, I'll start with some detail around the revenue for Q2 of fiscal 'twenty. FICO's revenue for the quarter was $308,000,000 an increase of 11 percent over the prior year. Our Applications segment revenue were $140,000,000 down 1% versus the same period last year. The decrease in revenue is driven primarily by lower license and professional services revenue.
Software applications bookings
for the quarter were $48,000,000 down 24%
from last year due in large part to COVID related disruptions in sales efforts at the end of March. In our Decision Management Software segment, Q2 revenues were $39,000,000 up 20% over the same period last year. The increase was primarily due to license and SaaS subscription revenues from our decision management platform products. Decision management software bookings were $23,000,000 in Q2, down 17% the previous year, similarly due to software sales disruptions at the end of the quarter. Finally, our Scores segment revenues were 129,000,000 dollars up 24% from the same period last year.
B2B Scores revenue was up 27% over the same period last year, and B2C revenues were up 15 percent from the same period. We do expect disruptions to Scores volumes, particularly on the B2B side as loan originations decline in some credit verticals. As Will said, Scores volumes are reported to us monthly in arrears, so we do not have visibility of the Scores volumes real time. Turning to our global revenue mix. In our 2nd fiscal quarter, 78% of total revenues were derived from our Americas region.
Our EMEA region generated 14%, and the remaining 8% was from the Asia Pacific region. Recurring revenues derived from transactional and maintenance sources represented 78% of total revenues in the quarter. Consulting and implementation revenues were 16% and license revenues 6% of the total. Revenues derived from our cloud delivered software as a service, or SaaS, products were $74,000,000 for the quarter, which included $58,000,000 in transactional revenue and $17,000,000 in professional services revenue. That's an increase of 12% from the previous year for our SaaS business.
Total bookings, including our Scores segments for the quarter, totaled $84,000,000 down 20% from last year. Those bookings generated $12,000,000 in current period revenues, a 14% yield. SaaS bookings were $31,000,000 for the quarter, which was up 6% from the previous year. Our operating expenses totaled $232,000,000 in this quarter, down $14,000,000 from the prior quarter, due primarily to decreases in travel, marketing and other discretionary expenses and the $3,000,000 in restructuring costs in Q1 that did not recur in Q2. FICO's GAAP operating margin for the 2nd quarter was 25%, and our non GAAP operating margin, as shown in our Reg G schedule, was 32%.
GAAP net income this quarter was $58,000,000 up 75% from the prior year. Our non GAAP net income was 60 $4,000,000 for the quarter, up 36% from the same quarter last year. Our effective tax rate this quarter was about 7%, which included about $12,000,000 of excess tax benefits resulting from stock based compensation activities. We expect our effective tax rate to be around 10% to 12% for the full fiscal year. Free cash flow for the quarter was $55,000,000 compared to $44,000,000 in the same period last year.
Free cash flow for the trailing 4 quarters was $259,000,000 Turning to the balance sheet. At the end of the quarter, we had $109,000,000 in cash. This is down $2,000,000 from last quarter, primarily driven by share repurchases, partially offset by cash generated from operations. Our total debt base value is $959,000,000 with a weighted average interest rate of 4.44%. At the end of the quarter, we had drawn $124,000,000 on our $400,000,000 revolving line of credit.
We anticipate drawing on that facility to pay for the $85,000,000 maturity of senior notes coming up in July. Our leverage ratio is calculated for our revolving line of credit was 2.25x. As a reminder, our current covenant is 3.0x and that covenant will expand to 3.25x when the notes mature mature in July. Turning to return of capital, we bought back 290,000 shares in the 2nd quarter for $96,000,000 at an average price of $3.31 per share. At the end of March, we had about $64,000,000 remaining on the Board repurchase authorization.
Finally, as Will said, because of the uncertainty around COVID-nineteen and the impacts on the economic environment, we are withdrawing our previously issued financial guidance. With that, I'll turn it back over to Will for some final comments.
And we're reconnecting.
We are reconnecting. Can you hear me?
I can hear you now, Will.
Yes, great. Okay. Work from home challenges. I'd like to end our prepared remarks today with some positive news. We're conducting a series of live webinars that we're calling Adapting to the Challenges of Today.
These webinars, which are almost a virtual FICO world, began last week and continue through May 28. The topics fall within 6 tracks: adaptability, digital customer engagement, risk management, operational efficiency, building trust and protecting customers. I'd encourage you to check it out. Information is available on our website. And there are a number of keynote sessions I think will be of interest to our investors, including one I'll be doing jointly with Equifax CEO, Mark Begore, on May 14.
Finally, I'd like to thank all of you for joining us today. These are challenging times, but I'm convinced we're up to the challenge. We can't control the external factors we face, but we can control how we respond and plan for the future. We're stewards of remarkable assets, and we remain optimistic as we look to the future. We'll bridge this period of disruption as we have in the past and we'll emerge place for growth.
And we'll be as transparent as possible as we work through this provide guidance as soon as we have a better understanding of the economics and commercial environment. So I'll now turn it back to Steve for Q and A.
Thanks, Will. We are now ready to take your questions. So operator, please open the lines.
You.
And our first question is from Manav Patnaik with Barclays. Please go
ahead. Yes.
Thank you. Good evening, gentlemen. I was just curious if you could talk to us about the volume trends that you saw in the quarter in the B2B business? I understand you can't see what's happening beyond that, but maybe what that growth was in the quarter and maybe how it looked like in March versus the prior 2 months?
You're talking about B2C, Manav?
No, B2B.
B2B. Mike, I don't know if you have the detail on that.
Yes. So the big three buckets of volumes in that part of our business, as you know, are the mortgage business, the auto business and then credit cards, personal loans, what we call the other segment. Mortgages were up, as you would expect, given some of the refi dynamics that have been in place for a number of months. And in the auto and other segments, volume changes were on a year over year basis were in the single digit percentages. So not really anything to write home about there.
With respect to the end of the quarter, the impact was close enough to the end of March, which is the last reports we have from our partners at the bureau. So we did not see anything informative from those volumes at the end of March. Frankly, what you've heard from the bureaus in their quarterly reports over the last week or number of days have more real time information than we have on that front.
Got it. And maybe just on the B2C business as well. I mean, your mix of business there has changed over the years. Do you anticipate that to be concentrated or A2C or how should we think about that?
So far, it's holding up nicely. And with respect to my FICO, for example, it's up. It's not surprising with consumer is very focused on their credit at this time.
Okay. And then just last one if I can squeeze it in. You talked about strong visibility on your transaction on the incident side of the software. So I was just curious if you could just give a little bit color on what you're seeing from your customers. I mean, has that decelerated?
Is that being pushed out much later? Like any thoughts there, please?
Yes. It is being pushed out. So remember, we have a very long sales cycle, 250 day sales cycle. So we had a lot of stuff that was in process that was closer to the end to the beginning of the process. And so that's some of that pushed to next quarter, some of it got closed.
The banks haven't been hit in the way they were back in 2,007, 2008. This is a different kind of a situation, as you know. And so we haven't seen them pulling back on their investment plans, at least not so far. Now it probably would be naive to believe that everything will be business as usual. And I'm sure on the margin, there'll be some business that we were hoping for that won't happen.
But we haven't seen tremendous changes in behavior other than the timeline for getting transactions done slowing down a little bit.
Got it. All right. Thank you, guys.
And we have a question from Bill Warmington with Wells Fargo. Please go ahead.
Good evening, everyone. So I wanted to ask if you could talk a little bit about what the revenue exposure is in scores for those 3 buckets, credit card, mortgage and auto? And that would be for the I'm assuming for the B2B side.
Bill, I think as Mike mentioned a minute ago, broadly mortgage looks like it's going to be up, auto looks like it's going to be way down, Credit cards and personal loans down. But I think you probably do better reading into the numbers that you see from the bureaus than asking us to speculate because we don't have it yet.
No, no. I appreciate that in terms of the volumes. But once we get a sense of the volumes, then we have to map it to the FICO B2B revenue. And I was just asking for some help in terms of how big is credit card as a percentage of revenue these days? How big is mortgage?
How big is auto? How does that break down across the Scores B2B universe?
Mike, do
you have those percentages? I don't
know if you have them handed.
Yes. Bill, we haven't shared those in the past, and I don't think this is the form to change that disclosure practice. But guess I can say that it hasn't changed materially, at least through the end of March, to what we've had in the past. So if your assumption in the past work for you, I would continue to use it.
Them. Okay.
Well, I don't know if they're working or not, but they're out there. All right. Well, then when you guys are talking about you made some references to margins and how there is some natural reduction in expenses going along with revenue and T and E reductions, fees and hiring and so on. Is the thought to try to preserve the margin that was implied in the original guidance, which looks like it was around 32%, 33% EBITDA, that's adjusted EBITDA level around 30% operating margin. Is that the thought to try to if there is lower revenue to try to preserve that margin percentage or your thought is to try to actually raise that margin percentage to offset the decline and deliver the same level of EPS?
I think, Bill, you can expect that we'll take every step within our power to manage our expenses to maximize the margin. So while we don't have complete control over the top line, we obviously have a little more control over the bottom line. And so I would hope that we could do better than preserving the rate.
Got it. But again, if
you look at the slide in our deck, we basically laid out what would have to be true for us to hit the prior guidance.
Correct. Okay. And then I guess in the context of expenses, I wanted to ask about your plans for continued investment in the software business and how that's going? You had mentioned, when you gave the original guidance, you talked about some opportunities for increased efficiency within the software business. I want to see how that's all how you're weighing all that now?
Well, as big an impact as COVID has been on our company, we were engaged in and continue to be engaged in a really extensive review of every activity that we have going on in the company. And our goal is to really focus on things that are truly strategic and to deemphasize things that are less strategic. And that initiative, that work proceeds to pace. That has not been slowed in the least by COVID. I think, if anything, we're more committed than ever to getting as much of our capability onto the platform as quickly as possible, so we can start to see the returns to scale that we're all looking for.
So I would say that our investment plans on strategic and platform stuff completely unchanged. If anything, we're looking for ways to free up resources to put even more against it. But then things that are off platform, off strategy, we're scrutinizing those very carefully.
And then last one for me. I wanted to ask about the FICO Resilience Index. It sounds like an interesting product. It looks like you're maybe you could talk a little bit about what the plan is for that one in terms of the rollout. It looks like Equifax is the only one right now doing a test with it.
But how soon do you think that's going to before that actually starts to generate some revenue, how big could it be?
We think it's going to be very big. It's not going to generate any revenue in the near term because our plan is to provide it for free along with FICO scores. So if you buy a FICO score, you can also get the FICO resiliency index along with it. We think that there's tremendous demand, maybe worth spending a minute on what it is. This is some really smart stuff that our guys came up with that helps us to differentiate amongst consumers and evaluate their credit within any particular FICO score, that's at a point in time, and a point in the economic cycle.
And there are individuals who are more resilient and there are individuals who are less resilient. And the traditional way of dealing with downturns and see it today is that lenders raise their lending thresholds. They raise their cutoffs. While obviously that's a prudent thing to do, we'd love for that to be a little more sophisticated and surgical and be able to evaluate some of the individuals below those cutoffs with more precision. And that's really what the FICO Resiliency Index does.
It will be bundled with the FICO score. It will be widely available to anyone who's buying FICO scores. It is currently in test, as you said, with Equifax and the Dow, Experian will have it up too. You should follow. And yes, we have high expectations because it's been very well received today.
Excellent. All right. Well, thank you very much.
And we have a question from Jeff Meuler with Baird.
Just within the software businesses, I understand that bookings are going to be impacted, which can impact revenue, license revenue, professional services. But in terms of client usage, I think there was a mention of collections and recovery. I'm guessing that's because of some collection hiatuses, but seeing some negative impacts there. But just what are you seeing across the different software businesses? Any kind of positives or negatives by the different products to call
out? We're seeing more in CCS and customer communication that's up a bit because the lenders are engaged in a lot more back and forth with their consumer customers than they have been in the past. So that's up a little. The others, not tremendously different impact. I mean, we're not seeing huge proportional shift or anything.
Okay. And then within
B2B Scores, how much of it is tied to, I guess, origination or marketing type volumes? And how much of it is stickier or account management or open access program type scores in terms of B2B's revenue mix?
We don't break it out. We don't break it out. I think it's fair to assume that there'll be a little less origination activity. I mean, that's not an unreasonable assumption. Okay.
And then there was 2 comments as you were talking about the special pricing. One was began to take effect and then started to see. Just any sense of roughly how much of the special pricing was the benefit was felt this quarter versus yet to be feathered in?
We have felt it. Yes, it's come in.
Okay. Thank you.
We have a question from Brett Huff with Stephens. Please go ahead.
Good afternoon, guys, and glad everybody is healthy and well. Question to follow-up on what I thought was an interesting comment you made on bank health. And Will, I think you phrased it, the banks weren't hit, aren't hit yet as hard or aren't hit as hard as maybe the Great Recession, just given this isn't bank led. A lot of our clients are trying to suss out kind of how banks are reacting. So could you just flush out that a little bit more?
I think you mentioned that you haven't seen any major changes in investment. But kind of what is their attitude as you talk with them about what their game plan is and how you can help them?
Well, I think that they're much better prepared than the last time. Their balance sheets are stronger. They have more capital on hand. They learned the last time around. And I also think that the government and the Fed have jumped in, in a way that very quickly in a way that they didn't the last time around took longer.
And so I think it's those kinds of things. And if you can see from their public statements, if you look at the public statements from the big bank CEOs, they're obviously planning to weather this much better than the last time around.
That's helpful. And any particular products that have peaked more interest in the last 6 weeks? I'm assuming maybe collections or something like that, but anything that has kind of spiked up given the changes in the outlook?
Just as I mentioned earlier, there's more usage of our customer communication services, which is the last mile customer consumer customer contact. Those volumes are up. Remember, long sales cycle, and so you wouldn't see things change quickly. Things that are in place, we're seeing more volume in places you'd expect like that, like the CCS. But otherwise, we're not seeing anything.
We're expecting with all the transaction volume down, credit card transaction volume down, it may have an impact on Falcon volumes. But most of our Falcon business is priced by account. And so I'm not sure how much impact it would really have on
us. Okay. And then last
question for me is, as you one of the things that a lot of folks have been asking us is kind of the value proposition that the FICO score continues to provide. And even at higher prices, we're of the opinion that it's still one of the best deals going in risk management and portfolio management. Any conversations, I don't know how much you can talk with banks about this, but what is the any added views on how does that value play out in an uncertain situation like this for banks? Do they perceive it differently? Are they looking to buy it differently, buy it more, etcetera, for that risk management in a situation like this?
So the answer is, yes, we strongly believe that it's a tremendous tool. The FICO score is tremendous tool for value and creditworthiness and more needed, more necessary, more in demand than ever in times like these. The resiliency index that I mentioned earlier is tied up in that. And the way we think about it is we're constantly innovating and trying to find ways to bring ever more sophistication to that evaluation, to that decision. And that's worked out pretty well.
Will they be pulling account management scores more frequently in these times to be determined, we'll see. We'll see. It wouldn't be a shock.
Okay, great. That's fine. I appreciate it.
And we have a question from Surinder Thind with Jefferies. Please go ahead.
Good afternoon. Will, I'd like to start with a question on the Scores business. Can you talk a little bit about the strength in the B2C segment? There was a little bit of a color on it earlier, but double digit growth at this point seems really strong. And yet, how should we think about the consumer in this environment?
And then maybe even from a competitive perspective in the sense that there are perhaps other competing services out there that are also trying to at least mimic providing consumers score type information for free?
Yes. I mean, that's been going on for years. There are players out there who provide non FICO scores to consumers to help them to give them a sense for what their creditworthiness. But since lenders predominantly use FICO scores, there's a mismatch there. Consumers are sometimes confused, but we've been working for a long time on trying to clear up that confusion and make sure that consumers understand that a credit score is not a FICO score unless it's a FICO score.
And that the what the consumer is trying to understand is what the lender thinks of them, what the lender's evaluation of their credit worthiness is, then the FICO score is the way to do it. We have an arrangement with Experian, our partner, where Experian provides FICO scores to the consumers and their consumer offerings. We offer obviously FICO scores in our own consumer offering in MyFICO. We think that there's more appetite and interest in that than ever. You just kind of given the situation, people are concerned about their credit.
And so we feel pretty good about that business.
Fair enough. And then related to that
Some of that business is tied to origination of credit cards. To the extent that there's decline there, that will slow that down.
That's helpful. And then in terms of any color on is Experian the primary source of the B2C revenues or is myFICO a a considerable percentage as well?
Experian is bigger than myfico. Revenues?
In terms of revenues, yes.
No, our MyFICO is a good business too, a good sized business too. I don't think we break out the specifics of it. But Experian is also very important to that business.
Understood. And then in terms of just a big picture question for the Scores business. Obviously, it is a very transaction driven business. Is there a consideration to maybe moving more towards a licensing model just to reduce some of the volatility? Or is there an appetite for that from clients?
Or is there any kind of discussions? Obviously, I think it was last quarter, I believe that there was a big licensing deal. Any color or thoughts that you might be having with clients, especially maybe in the current environment or not something like this?
Most of our Scores business is priced per
score. Understood. Meaning that from your guys' perspective, from a strategy perspective, the desire for you guys to go more towards a licensing model.
Well, we're pretty happy with the model that we have. I don't know that we're looking to modify it.
Understood. And then moving towards the software business, can you talk a little bit about the applications business versus DMS maybe? The idea being that how should we maybe think about the mix of sales on a go forward basis? Is the sales force being incentivized to maybe sell DMS over applications? Or I know in the past that times you guys have talked about that you're agnostic, but obviously DMS is the platform of the future.
Right. We have historically paid a little bit extra attention to from a sales force perspective to selling DMS based products. But at the end of the day, we sell to our customers what they need. And if it's DMS based, fantastic. And if it's not, then so be it.
We'll do it that way. And we compensate our salespeople regardless of what it is they sell. I think your point is well taken though. And as we think into the future, we likely will favor DMS sales over non DMS sales. So I think that is the that's the piece of the business to really watch.
That's the future.
That's helpful. And then maybe turning to expenses. I mean, obviously, given the strength of your cash flows, the balance sheet as a firm, I mean, do you really have to think about playing defense in the current environment? I mean, I got the sense that you guys were obviously watching expenses carefully. Obviously, that's good to do at any point in time, but how should we just think about your overall expense allocation at this point or investment versus maybe what it would be under normalized conditions?
How much of a difference are you guys kind of seeing? Obviously, there's a natural component to it, meaning obviously the less travel, less marketing type stuff. But just any color there would be helpful as well.
If you're asking about COVID specific kind of implications that you just mentioned them, it's things like travel and it's the fact that when revenue is lower, we have less expense associated with servicing that revenue. So that part is for sure. I wouldn't say that we're in a place where suddenly because of COVID, our backs are to the wall and we have to rethink our entire expense structure. I think we're doing the thing that management always does, which is reviewing whether every dollar is well spent. And we are engaged in that process and continue to be engaged in that process.
But I wouldn't call it an emergency or a response to COVID. I think it's just running the business.
Okay. No, understood. And that was actually my point that you guys really do have a strong cash flows balance sheet so that you don't perhaps need to be as defensive as maybe other organizations are. Absolutely. And then I guess turning to I guess, the question being that, in terms of just the when I look at the personal expenses, headcounts are up year over year, but the personal costs are down.
Is that mostly like variable comp that is the delta there? Or how should we be thinking about that difference?
Mike, do you want to take that?
It's 2 things. So as you may recall, we had a restructuring expense last quarter. Part of that was to reduce headcount. And so there's some of that. And then also, we accrue throughout the year year end incentive bonuses, both cash and stock based, based on certain expected outcome, and that outcome, we could exceed it or underperform.
And the rate at which we accrue those year end does have an impact on the period to period labor costs. The big picture though is that headcount is essentially flat. I think it's up 0.5% versus where we were last quarter. And there's nothing significant going on in terms of the mix of compensation or the rate of change of compensation per person.
There are no further questions at this time.
Thank you. Thank you everyone for joining today's call. We look forward to talking with you again soon. Stay safe and healthy and thank you again.
That concludes the call
for today.
We thank you for your participation and ask that you please disconnect your line.