What Fair Isaac Predicts

Ninety percent of North American wireless carriers use Fair Isaac’s software to monitor the “roaming” charges on cell phones, for example, letting Verizon know that when a Sprint customer moves into Verizon’s service area, his cell phone has not been reported stolen.

Fair Isaac software may also have helped a retailer decide to mail to you, but not your neighbor, a discount coupon toward the purchase of a flat-screen TV. Or it might determine whether your experience with financial paperwork at a hospital admissions desk is a hassle or a breeze. Fair Isaac touches hundreds of millions of consumers around the world, but almost never directly and mostly without them knowing it. Its software runs in the background, and helps companies manage the risk inherent in their relationships with customers. It has some 2,800 employees worldwide, about 450 of them in Minneapolis.

But “the real heritage and brainpower of the company,” Greene explains, “is a group of about 80 very talented scientists and mathematicians who are skilled at applying complex math to business problems.” Most of them are still in the original office in San Rafael. And these days, they and Greene are working on managing a new kind of risk: Fair Isaac’s own as it seeks to get even bigger.

The Peanut Butter Is Too Thin

Greene says his top priority as the firm’s new CEO can be expressed in a single word: growth. He says he is confident that the company can begin posting double-digit annual growth rates in the near future. “I can see my way toward a market capitalization for this company of $5 billion, as opposed to today’s $2 billion. I won’t give you a target date for that because we haven’t gone public yet” with financial projections, he adds. “But I think we can do it.”

He expects skepticism when he says it, because at the moment, he admits, Fair Isaac appears to be “treading water.” The company saw a modest rise in revenue in its fiscal 2006 (which ended September 30), but a decline in net income and earnings per share. Revenues were $825 million, up from $799 million in 2005, but net income dropped 23 percent, to $103 million from $134 million the previous year. Earnings per share dipped to $1.59 from a record high of $1.86 in 2005. Fair Isaac attributes the plunge in net income mainly to new accounting rules for stock-option expenses, and to one-time costs associated with an acquisition that went awry and wasn’t completed. 

The bad news continued in fiscal 2007, however, when Fair Isaac had to warn of lower-than-expected sales and earnings for the second quarter, and dropped its revenue and income projections for the year. Revenue would be $795 million to $805 million—less than in 2006, and down from a previous forecast of $870 million. Estimated earnings per share for the year would be $1.55 to $1.65, down from a forecast of $2.15. The day after the April 16 announcement, selling by skittish investors dropped the price of FIC shares 8.6 percent to $37.08.

Equity analysts have attributed the company’s disappointing results to the worsening mortgage market, but also to poor sales execution and delays in product upgrades. Another concern is a threat to Fair Isaac’s core business in credit scoring.