The Daily Magic Formula Stock for 08/07/2008 is Fair Isaac Corp. According to the Magic Formula Investing Web Site, the ebit yield is 9% and the EBIT ROIC is >100 %.
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Fair Isaac Corporation (NYSE: FIC) (together with its consolidated subsidiaries, the â€śCompanyâ€ť, which may also be referred to in this report as â€śwe,â€ť â€śus,â€ť â€śour,â€ť and â€śFair Isaacâ€ť) provides products and services that enable businesses to automate, improve and connect decisions to enhance business performance. Our predictive analytics and decision management systems power hundreds of billions of customer decisions each year.
We were founded in 1956 on the premise that data, used intelligently, can improve business decisions. Today, we help thousands of companies in 80 countries use our Enterprise Decision Management technology to target and acquire customers more efficiently, increase customer value, reduce fraud and credit losses, lower operating expenses, and enter new markets more profitably. Most leading banks and credit card issuers rely on our solutions, as do insurers, retailers, telecommunications providers, healthcare organizations, pharmaceutical companies and government agencies. We also serve consumers through online services that enable people to purchase and understand their FICO Â® scores, the standard measure in the United States of credit risk, empowering them to manage their financial health.
More information about us can be found on our principal website, www.fairisaac.com. We make our Annual Report on Form 10-K, our Quarterly Reports on Form 10-Q and our Current Reports on Form 8-K, as well as amendments to those reports, available free of charge through our website as soon as reasonably practicable after we electronically file them with the SEC. Information on our website is not part of this report.
PRODUCTS AND SERVICES
We help businesses automate, improve and connect decisions across the enterprise, an approach we commonly refer to as Enterprise Decision Management, or â€śEDMâ€ť. Most of our solutions address customer decisions, including customer targeting and acquisition, account origination, customer management, fraud, collections and recovery. We also help businesses improve noncustomer decisions such as transaction and claims processing, and network integrity review. Our solutions enable users to make decisions that are more precise, consistent and agile, and that systematically advance business goals. This helps our clients to reduce the cost of doing business, increase revenues and profitability, reduce losses from risks and fraud, and increase customer loyalty.
We deliver EDM through products and services that we categorize into the following four operating segments:
â€˘ Strategy Machine Â® Solutions. These are preconfigured EDM applications designed for a specific type of business problem or process, such as marketing, account origination, customer management, fraud and insurance claims management. This segment also includes our myFICO solutions for consumers.
â€˘ Scoring Solutions. Our scoring solutions give our clients access to analytics that can be easily integrated into their transaction streams and decision-making processes. Our scoring solutions are distributed through major credit reporting agencies, and we also offer services that provide our scores to clients directly.
â€˘ Professional Services. Through our professional services, we tailor our EDM products to our clientsâ€™ environments, and we design more effective decisioning environments for our clients. This segment includes revenues from custom engagements, business solution and technical consulting services, systems integration services, and data management services.
â€˘ Analytic Software Tools. This segment is composed of software tools that clients can use to create their own custom EDM applications.
Comparative segment revenues, operating income and related financial information for fiscal 2007, 2006 and 2005 are set forth in Note 17 to the accompanying consolidated financial statements.
Our solutions involve three fundamental disciplines:
â€˘ Analytics to identify the risks and opportunities associated with individual clients, prospects and transactions, in order to detect patterns such as fraud, and to improve the design of decision logic or â€śstrategiesâ€ť;
â€˘ Data management, profiling and text recognition that bring extensive customer information to every decision; and
â€˘ Software such as rules management systems that implement business rules, models and decision strategies, often in a real-time environment.
All of our solutions are designed to help businesses make decisions that are faster, more precise, more consistent and more agile, while reducing costs and risks incurred in making decisions.
Strategy Machine Solutions
We develop industry-tailored EDM applications, which we call Strategy Machine Solutions, that apply analytics, data management and decision management software to specific business challenges and processes. These include credit offer prescreening, insurance claims management, telecommunications fraud prevention and others. Our Strategy Machine Solutions primarily serve clients in the financial services, insurance, healthcare, retail and telecommunications sectors.
Marketing Strategy Machine Solutions
The chief Strategy Machine offering for marketing is our Fair Isaac MarketSmart Decision System Â® solution (â€śMarketSmartâ€ť). The MarketSmart solution is a suite of products, capabilities and services designed to integrate all of the technology and analytic services needed to perform context-sensitive customer acquisition, cross-selling and retention programs. The MarketSmart solution enables companies that offer multiple products and use multiple channels (companies such as large financial institutions, consumer branded goods companies, pharmaceutical companies, retail merchants and hospitality companies) to execute more efficient and profitable customer interactions. Services offered under the MarketSmart brand name include SmartLink customer data integration services; services that use transaction analytics to identify customer patterns and help clients target their marketing activities; services that enable real-time marketing through direct consumer interaction channels; campaign management and optimization services; interactive tools that automate the design, execution and collection of customer response data across multiple channels; and customer data collection, management and profiling services.
A number of our marketing services are designed for specific industries, such as retail and pharmaceuticals. For example, our services for retailers include using analytics to help retailers identify and market to their store shoppers; analyzing transaction data to provide insights into store customer activity and compare it with sales pattern activity across the marketplace; and analyzing a retailerâ€™s purchase transaction data to help them understand buying patterns, sequences and contexts.
Originations Strategy Machine Solutions
We provide solutions that enable banks, credit unions, finance companies, installment lenders, telecommunications service providers and other companies to automate and improve the processing of requests for credit or service. These solutions increase the speed and efficiency with which requests are handled, reduce losses and increase approval rates through analytics that assess applicant risk, and reduce the need for manual review by loan officers.
Our solutions include the web-based LiquidCredit Â® decision engine and LiquidCredit Â® service, which are primarily focused on the credit decision and offered largely to mid-tier financial services institutions, e-commerce providers and telecommunications providers; and Capstone Â® Decision Manager, a complete end-user software solution for application decisioning and processing. We also offer Capstone Decision Accelerator, which is a rules-based application based on our Blaze Advisor TM business rules management system. We also offer custom and consortium-based credit risk and application fraud models.
Customer Management Strategy Machine Solutions
Our customer management products and services enable businesses to automate and improve decisions on their existing customers. These solutions help businesses decide which customers to cross-sell, what additional products and services to offer, whether customer risk levels have increased or decreased, when and how much to change a customerâ€™s credit line, what pricing adjustments to make in response to account performance or promotional goals, and how to treat delinquent and high-risk accounts.
We provide customer management solutions for:
â€˘ Financial Services. In financial services, our leading account and customer management product is the TRIAD TM adaptive control system. Our adaptive control systems are so named because they enable businesses to rapidly adapt to changing business and internal conditions by designing and testing new strategies in a â€śchampion/challengerâ€ť environment. The TRIAD system is the worldâ€™s leading credit account management system, and our adaptive control systems are used by more than 250 issuers worldwide to manage approximately 65% of the worldâ€™s credit card accounts. Our latest version of the TRIAD system enables users to manage risk and communications at both the account and borrower level from a single platform. We also offer transaction-based neural network models (the term neural network is defined under â€śTechnologyâ€ť later in this section) called TRIAD Transaction Scores that help card issuers identify high-risk behavior more quickly and thus manage their credit card accounts more profitably. We market and sell TRIAD end-user software licenses, maintenance, consulting services, and strategy design and evaluation. Additionally, we provide TRIAD services and similar credit account management services through 12 third-party credit card processors worldwide, including the two largest processors in the U.S., First Data Resources, Inc. and Total System Services, Inc. We also provide the TRIAD system as a hosted service in Application Service Provider (â€śASPâ€ť) mode.
â€˘ Telecommunications. The TelAdaptive Â® account management service offers telecommunications service providers account management functionality similar to the TRIAD system, including receivables risk management, account spending limits, churn management and cross-sell communications.
â€˘ Insurance. We provide property and casualty insurers with decision management solutions that enable them to create, test and implement decision strategies for areas such as cross-selling, pricing, claims handling, retention, prospecting and underwriting.
Fraud Strategy Machine Solutions
Our fraud products improve our clientsâ€™ profitability by predicting the likelihood that a customer account is experiencing fraud. Our fraud products analyze customer transactions in real time and generate recommendations for immediate action, which is critical to stopping fraud and abuse. These applications can also detect some organized fraud schemes that are too complex and well-hidden to be identified by other methods.
Our solutions are designed to detect and prevent a wide variety of fraud and risk types across multiple industries, including credit and debit payment card fraud; identity fraud; telecommunications subscription fraud, technical fraud and bad debt; healthcare fraud; Medicaid and Medicare fraud; and property and casualty insurance fraud, including workersâ€™ compensation fraud. Fair Isaac fraud solutions protect merchants, financial institutions, insurance companies, telecommunications carriers, government agencies and employers from losses and damaged customer relationships caused by fraud.
Our leading fraud detection solution is Falcon Â® Fraud Manager, recognized as the leader in global payment card fraud detection. Falcon Fraud Managerâ€™s neural network predictive models and patented profiling technology, both further described below in the â€śTechnologyâ€ť section, examine transaction, cardholder and merchant data to detect a wide range of credit and debit card fraud quickly and accurately. Falcon Fraud Manager analyzes card transactions in real time, assesses the risk of fraud, and takes the user-defined steps to prevent fraud while expediting legitimate transactions. Falcon Fraud Manager protects hundreds of millions of credit and debit card accounts and is used in approximately 65% of all credit card transactions worldwide.
Fraud Predictor with Merchant Profiles is used in conjunction with Falcon Fraud Manager to improve fraud detection rates by analyzing merchant profile data. The merchant profiles include characteristics that reveal, for example, merchants that have a history of higher fraud volumes, and which purchase types and ticket sizes have most often been fraudulent at a particular merchant.
Falcon ID solution enables lenders and telecommunications service providers to control identity fraud across the customer lifecycle. Falcon ID relies on multiple sources of data and complex statistical modeling techniques to identify activity that is at high risk of stemming from identity theft. It also provides business rules management that companies can use to identify and resolve cases that appear to involve identity theft.
In addition to the Falcon products for financial services institutions, we offer CardAlert Fraud Manager. CardAlert Fraud Manager is a solution for fighting debit and ATM fraud in the U.S. The CardAlert service identifies and reports counterfeit payment cards to issuers before the majority of them incur fraud losses. The service analyzes daily transactions across multiple financial institutions, and uses this data to pinpoint multi-card fraud and identify common points of compromise.
We also provide a set of Fraud/Risk Analytics for Telecom solutions that are specifically designed to help telecommunications service providers reduce losses in four key areas. The bad debt solution is used to mitigate early-life and ongoing bad debt. The fraud solution is used to reduce complex types of fraud such as subscription fraud, technical fraud, network fraud, internal fraud, dealer/agent fraud, calling card fraud, cloning and clip-on fraud. The revenue assurance solution predicts revenue leakage in the switch data collection, data mediation and billing/rating system phases. And the network assurance solution predicts problems in a telecommunications network by detecting intrusion, abuse or network integrity compromises. In addition, we offer RoamEx tm Roamer Data Exchanger, which delivers near real-time exchange of roamer call records that occur when subscribers roam outside a carrierâ€™s home network. RoamEx Roamer Data Exchanger is used to exchange more than 90% of North American wireless carriersâ€™ roamer call detail records.
Collections & Recovery Strategy Machine Solutions
Our leading solutions in this area are the Debt Manager tm solution and the Recovery Management SystemTM (â€śRMS tm â€ť) solution. The Debt Manager solution automates the full cycle of collections and recovery, including early collections, late collections, asset disposal, agency placement, recovery, litigation, bankruptcy, asset management and residual balance recovery. The RMS solution is focused on the later phases of distressed debt management, including bankruptcy and agency management. Companies using the Debt Manager and RMS solutions can access partner services such as collection agencies and attorneys via the ScoreNet Â® network, which provides web-based access to and from thousands of third-party collections and recovery service providers, as well as access to multiple data sources and Fair Isaac solutions hosted in ASP mode.
Other solutions for collections and recovery include the PlacementsPlus Â® service, an account placement optimization and management system; the Placement OptimizerSM service, which uses artificial intelligence-based analytics used to identify the agency that is likely to collect the most for each account; and custom collection and recovery models implemented in an ASP environment. Those analytic-based solutions can also be delivered via the ScoreNet network.
Insurance and Healthcare Strategy Machine Solutions
We provide software solutions and services that automate the review and repricing of medical bills for workersâ€™ compensation and automobile medical injuries. Using these solutions, property and casualty insurers can automatically review and reprice a significant percentage of medical bills without human intervention. This allows for greater consistency and accuracy, which are important factors for regulatory compliance.
Our principal solution in this area is the Fair Isaac SmartAdvisor Â® medical bill review software. This solution provides medical bill review and repricing for workersâ€™ compensation and automobile medical injury claims. It checks each bill against an extensive database of state fee schedules, automated contracts and user-defined policies to help insurers and others get the maximum savings on every bill reviewed. The SmartAdvisor software uses our business rules management technology to increase the speed, accuracy and consistency of decisions and reduce labor costs. It is available in both licensed client/server and ASP versions.
We also provide fraud solutions for different segments of the insurance healthcare market. Our principal solutions in this area are:
â€˘ Payment Optimizer Â® fraud detection system, which provides both prepayment claims scoring and retrospective analysis to help payers reduce fraud losses and ensure payment integrity.
â€˘ VeriComp Â® Fraud Manager software, which uses neural networks and data analysis to identify potentially fraudulent workersâ€™ compensation claims that need investigation or special handling.
Additionally, we serve the insurance claims management market through our MIRA TM Claims Advisor product which uses predictive models to forecast appropriate claims reserves based on individual claim data. We also provide services that help healthcare payers reduce claims leakage and detect fraud, and that help hospitals determine payment strategies for patients during the admission process.
Consumer Strategy Machine Solutions
Through our myFICO Â® service, we provide solutions based on our analytics to consumers, sold directly by us or through distribution partners. Consumers can use the myfico.com website to purchase their FICO Â® scores, the credit reports underlying the scores, explanations of the factors affecting their scores, and customized advice on how to manage their scores. Customers can also use the myFICO Â® service to simulate how taking specific actions would affect their FICO Â® score. The myfico.com website is the only source for consumers to obtain their FICO Â® scores and credit reports from all three of the major U.S. credit reporting agencies. Consumers can also purchase Score Watch tm subscriptions, which deliver alerts via email and SMS or text messages when the userâ€™s scores or balances change. The myFICO Â® products and subscription offerings are available online at www.myfico.com in partnership with the three major U.S. credit reporting agencies: Equifax Inc. (â€śEquifaxâ€ť), TransUnion Corporation (â€śTransUnionâ€ť) and Experian Information Solutions, Inc. (â€śExperianâ€ť). The myFICO Â® products and subscription offerings are also available to consumers through lenders, financial portals and numerous other partners.
We develop the worldâ€™s leading scores based on third-party data. Our FICO Â® credit scores are used in most U.S. credit decisions, by most of the major financial service and credit card organizations as well as by mortgage and auto loan originators. These scores provide a consistent and objective measure of an individualâ€™s credit risk. Credit grantors use the FICO Â® scores to prescreen solicitation candidates, to evaluate applicants for new credit and to review existing accounts. The FICO Â® scores are calculated based on proprietary scoring models. The scores produced by these models are available through each of the three major credit reporting agencies in the United States: TransUnion, Experian and Equifax. Users generally pay the credit reporting agencies scoring fees based on usage, and the credit reporting agencies share these fees with us.
In fiscal 2007, we released upgraded versions of the FICO Â® score in Canada that we deliver through Equifax and TransUnion and provide credit grantors with additional predictive strength. In addition, we completed work on a substantially upgraded version of the FICO Â® score for U.S. lenders. This release will include enhancements that increase its predictive power. It is expected to be installed at the three major credit reporting agencies beginning in fiscal 2008. We also offer the NextGen FICO Â® score to U.S. credit grantors desiring an even stronger risk predictor than the â€śclassicâ€ť FICO Â® scores. FICO Â® scores are also delivered through TransUnion ITC in South Africa and CallCredit in the UK.
Our scoring portfolio also includes the FICO Â® Expansion Â® score, which provides scores on U.S. consumers who do not have traditional FICO Â® scores, generally because they have too few credit accounts being reported to the credit reporting agencies. The score analyzes multiple sources of non-traditional credit data accessed by our subsidiary, Fair Isaac Network, Inc., and the score and associated reports are provided to lenders through a subsidiary called Fair Isaac Credit Services, Inc.
Outside of North America, we offer the Global FICO Â® score, which extends our thorough analysis of multiple-lender credit data to countries around the world that have established and emerging credit bureaus. Like FICO Â® scores in North America, Global FICO Â® scores help lenders in multiple countries leverage the FICO Â® scoreâ€™s predictive analysis to assess the risk of prospects, applicants and borrowers, and are particularly valuable in markets where there is not a dominant credit bureau risk score available. Global FICO Â® scores are in use or being implemented in more than 16 different countries across four continents. In fiscal 2007 we extended the score to Korea through a multi-year agreement with Korea Credit Bureau.
In addition to the scoring noted above, we also offer marketing and bankruptcy scores through the U.S. credit reporting agencies; an application fraud, revenue and bankruptcy score available in Canada; consumer risk scores through credit reporting agencies in Canada, South Africa and the U.K.; commercial credit scores delivered by both U.S. and U.K. credit reporting agencies; and a bankruptcy scoring service offered through ISC, a subsidiary of Visa USA.
We have developed scoring systems for insurance underwriters and marketers. Such systems use the same underlying statistical technology as our FICO Â® risk scores, but are designed to predict applicant or policyholder insurance loss risk for automobile or homeownersâ€™ coverage. Our insurance scores are available in the U.S. from TransUnion, Experian, Equifax and ChoicePoint, Inc., and in Canada from Equifax. We also offer an insurance score called the Property PredictR TM score, which analyzes property inspection database data from an insurance services provider, Millennium Information Services, Inc., to calculate the loss risk of a property.
We provide credit bureau scoring services and related consulting directly to users in financial services through two U.S.-based services: PreScore Â® Service for prescreening solicitation candidates, and the FICO Â® score delivery service (formerly known as ScoreNet Â® Network) for customer account management.
We provide a variety of custom offerings, business solution and technology consulting services, and data management services to clients worldwide. The focus is on leveraging our industry experience and technical expertise, typically on a custom basis, to help clients address unique business challenges, to support the usage of our Strategy Machine Â® solutions and our analytic software tools, and to create new sales opportunities for our other offerings. This group also performs consultative selling, developing customized solution sets combining various products and capabilities to meet unique client or industry opportunities. These services are generally offered on an hourly or fixed fee basis.
Our services include:
â€˘ Solution and technology consulting. We help clients implement and use our solutions and technologies. These projects draw on our product knowledge, industry expertise and technical skills. Each project is delivered using our EDM consulting methodology.
â€˘ Data management services. We help clients gain insight into their customers by enabling the access, analysis and application of corporate data and information. This work involves implementing enterprise-level data and decision management systems, including data warehouses and marts, campaign management tools, database marketing engines, rules-based decision engines and analytical applications.
â€˘ Industry consulting. We combine our knowledge of EDM technology with our consultantsâ€™ experience to address the specific needs of companies in the financial services, retail, pharmaceuticals, telecommunications, insurance and healthcare industries. Our industry consultants provide a wide range of consulting services, including business strategy consulting and custom solutions development. Another focus of this work is helping companies comply with regulations, such as the New Basel Capital Accord or Solvency II.
â€˘ Analytic consulting. We perform custom predictive modeling and related analytic projects for clients in multiple industries. This work leverages our analytic methodologies and expertise to solve risk management and marketing challenges for a single business, using that businessâ€™s data and industry best practices to develop a highly customized solution. Most of this work falls under our heading of Predictive Science engagements, which provide greater insight into customer preferences and future customer behavior. We also perform broader strategy optimization projects using our Strategy Science technology and related advanced analytic methodologies. These projects apply data and proprietary algorithms to the design of customer treatment strategies.
â€˘ Fraud consulting. We complement our fraud products with consulting engagements that help businesses benchmark their performance, assess areas to improve and adopt best practices and solutions aimed at reducing fraud losses. These engagements draw on Fair Isaacâ€™s experience helping lenders and other parties worldwide bring fraud losses under control and implement more successful anti-fraud programs.
â€˘ Medical bill review services. Using Fair Isaacâ€™s medical bill review software, we provide turnkey insurance bill review services at selected locations across the country. These service bureau operations offer expert medical bill and preferred provider review for workersâ€™ compensation and auto medical insurance bills, including the additional review of complex medical, hospital and surgical bills.
Analytic Software Tools
We provide end-user software products that businesses use to build their own tailored EDM applications. In contrast to our packaged Strategy Machine solutions developed for specific industry applications, our analytic software tools support the addition of EDM capabilities to virtually any application or operational system. These tools are sold as licensed software, and can be used by themselves or together to advance a clientâ€™s Enterprise Decision Management. We use these tools as common software components for our own EDM applications, described above in the Strategy Machine Solutions section. They are also key components of our EDM architecture, described in the Technology section. We also partner with third-party providers within given industry markets and with major software companies to embed our tools within existing applications.
The principal products offered are software tools for:
â€˘ Rules Management. The Blaze Advisor TM business rules management system is used to design, develop, execute and maintain rules-based business applications. The Blaze Advisor system enables businesses to more quickly develop complex decision making applications, respond to changing customer needs, implement regulatory compliance and reduce the total cost of day-to-day operations. The Blaze Advisor system is sold as an end-user tool and is also the rules engine within several of our Strategy Machine solutions. A related software offering called SmartForms for Blaze Advisor system is used to create and manage dynamic, web-based forms that improve the completeness and accuracy of customer data collected online. The Blaze Advisor system, available in six languages, is a multi-platform solution that supports Web Services and SOA, Java 2 Enterprise Edition (J2EE) platforms, Microsoft .NET and COBOL for z/OS mainframes, and is the first rules engine to support Java, .NET and COBOL deployment of the same rules. It also incorporates the exclusive Rete III rules execution technology, which improves the efficiency and speed with which the Blaze Advisor system is able to process and execute complex, high-volume business rules. The latest version of Blaze Advisor, released in fiscal 2007, focuses on rules lifecycle management to help customers uniquely address governance, proactively detect errors and accelerate time-to-production. This version also includes tight integration with Model Builder for Predictive Analytics and support for PMML (Predictive Modeling Markup Language).
â€˘ Model Development. Model Builder for Predictive Analytics enables the user to develop and deploy sophisticated predictive models for use in automated decisions. This software is based on the methodology and tools Fair Isaac uses to build both client-level and industry-level predictive models, and which we have evolved over nearly 40 years. The predictive models produced can be embedded in custom production applications or one of our Strategy Machine Solutions and can also be executed in Blaze Advisor. The latest version of Model Builder, released in fiscal 2007, includes several enhancements to improve data import and sampling, as well as a scorecard creation wizard that makes building a new scorecard faster.
â€˘ Data-Driven Strategy Design. Model Builder for Decision Trees enables the user to create empirical strategies, augmenting the userâ€™s expert judgment by applying data-driven analytics to discover patterns empirically. In designing the steps and criteria of a decision strategy, the user can segment the customer base for targeted action based on the results of different performance measures, and can simulate the performance of the designed strategy. Decision Optimizer, a key component in our Strategy Science offerings, uses an optimization algorithm to deliver customer treatment strategies or rule sets that improve results along one or more specified business objectives, while meeting stated constraints. The data-driven strategies produced by these tools can be executed by Blaze Advisor or one of our Strategy Machine Â® solutions.
â€˘ Case Management. Vectus Â® software allows organizations to build and deliver enterprise-class applications for handling complex case management and relationships across customer, supplier and partner chains. It supports many types of business solutions, including account recruitment, customer servicing, complaints management and legal process. Vectus software provides a complete environment for developing, maintaining and executing process-oriented solutions.
A. George Battle. Director since August 1996 and Chair of the Board of Directors since February 2002; Chair of the Governance, Nominating and Executive Committee; Age 63.
From January 2004 through August 1, 2005, Mr. Battle served as Executive Chairman of Ask Jeeves, Inc., a provider of information search and retrieval services. From December 2000 until January 2004, Mr. Battle served as Chief Executive Officer of Ask Jeeves. From 1968 until his retirement in 1995, Mr. Battle was an employee and then partner of Arthur Andersen LLP and Accenture Ltd., global accounting and consulting firms. Mr. Battleâ€™s last position at Accenture was Managing Partner, Market Development, responsible for Accentureâ€™s worldwide industry activities, its Change Management and Strategic Services offerings, and worldwide marketing and advertising. Mr. Battle is a director of the following public companies in addition to Fair Isaac: Netflix Inc., Advent Software, Inc., and Expedia, Inc. He is also a director of the Masters Select family of funds. Mr. Battle received an undergraduate degree from Dartmouth College and an M.B.A. from the Stanford University Business School.
Tony J. Christianson. Director since November 1999; Member of the Compensation Committee; Age 55.
Since 1980, Mr. Christianson has been the Chairman of Cherry Tree Companies, an investment management and investment banking firm. Mr. Christianson is a director of the following public companies in addition to Fair Isaac: Dolan Media Company, Titan Machinery, Inc. and Peoples Educational Holdings. He received an undergraduate degree from Saint Johnâ€™s University, Collegeville, Minnesota, and an M.B.A. from Harvard Business School.
Nicholas F. Graziano. New Nominee; Age 35.
Since September 2006, Mr. Graziano has been a Managing Director of Sandell Asset Management Corp., an investment manager. From February 2004 to July 2006, Mr. Graziano was an investment analyst with Icahn Associates Corp, the primary investment vehicle of Carl Icahn including Icahn Partners, a multi-billion dollar global hedge fund. From February 2002 to February 2004, Mr. Graziano was an analyst with March Partners LLC, a global event-driven hedge fund. From May 1999 to May 2000, and from September 2000 to October 2001, Mr. Graziano was employed as a Vice President in the Investment Banking Department of Thomas Weisel Partners, an investment bank. From May 2000 to September 2000, Mr. Graziano was Vice President of Business Development at Forbes.com, the online subsidiary of Forbes Inc. From 1995 to 1999, Mr. Graziano was employed by Salomon Smith Barney as an Associate in the Financial Sponsors Group. Mr. Graziano is a director of the following public companies in addition to Fair Isaac: InfoSpace, Inc. and WCI Communities, Inc. Mr. Graziano earned an undergraduate degree and an M.B.A. from Duke University.
Mark N. Greene. Director since February 2007; Age 53.
Dr. Greene joined Fair Isaac as Chief Executive Officer and director in February 2007. From 1995 to 2007, he held various leadership positions in the financial services industry segment and software business groups of IBM. Prior to joining IBM, he served in leadership roles with Technology Solutions Company, Berkeley Investment Technologies, and Citicorp. From 1982 until 1988, he was an economist with the Federal Reserve Board. He received his bachelorâ€™s degree from Amherst and his masters and doctorate degrees from the University of Michigan.
MANAGEMENT DISCUSSION FROM LATEST 10K
We are a leader in Enterprise Decision Management (â€śEDMâ€ť) solutions that enable businesses to automate, improve and connect decisions to enhance business performance. Our predictive analytics and decision management systems power hundreds of billions of customer decisions each year. We help companies acquire customers more efficiently, increase customer value, reduce fraud and credit losses, lower operating expenses and enter new markets more profitably. Most leading banks and credit card issuers rely on our solutions, as do many insurers, retailers, telecommunications providers, healthcare organizations, pharmaceutical and government agencies. We also serve consumers through online services that enable people to purchase and understand their FICO Â® scores, the standard measure in the United States of credit risk, empowering them to manage their financial health.
Most of our revenues are derived from the sale of products and services within the consumer credit, financial services and insurance industries, and during the year ended September 30, 2007, 74% of our revenues were derived from within these industries. A significant portion of our remaining revenues is derived from the telecommunications, retail industries, as well as the government sector. Our clients utilize our products and services to facilitate a variety of business processes, including customer marketing and acquisition, account origination, credit and underwriting risk management, fraud loss prevention and control, and client account and policyholder management. A significant portion of our revenues is derived from transactional or unit-based software license fees, annual license fees under long-term software license arrangements, transactional fees derived under scoring, network service or internal hosted software arrangements, and annual software maintenance fees. The recurrence of these revenues is, to a significant degree, dependent upon our clientsâ€™ continued usage of our products and services in their business activities. The more significant activities underlying the use of our products in these areas include: credit and debit card usage or active account levels; lending acquisition, origination and customer management activity; workersâ€™ compensation and automobile medical injury insurance claims; and wireless and wireline calls and subscriber levels. Approximately 75% of our revenues during fiscal 2007 were derived from arrangements with transactional or unit-based pricing. We also derive revenues from other sources which generally do not recur and include, but are not limited to, perpetual or time-based licenses with upfront payment terms, non-recurring professional service arrangements and gain-share arrangements where revenue is derived based on percentages of client revenue growth or cost reductions attributable to our products.
Within a number of our sectors there has been a sizable amount of industry consolidation. In addition, many of our sectors are experiencing increased levels of competition. As a result of these factors, we believe that future revenues in particular sectors may decline. However, due to the long-term customer arrangements we have with many of our customers, the near-term impact of these declines may be more limited in certain sectors.
One measure used by management as an indicator of our business performance is the volume of bookings achieved. We define a booking as estimated future contractual revenues, including agreements with perpetual, multi-year and annual terms. Bookings values may include: (i) estimates of variable fee components such as hours to be incurred under new professional services arrangements and customer account or transaction activity for agreements with transactional-based fee arrangements; (ii) additional or expanded business from renewals of contracts; and (iii) to a lesser extent, previous customers that have attrited and been resold only as a result of a significant sales effort. In the fourth quarter of fiscal 2007, we achieved bookings of $94.5 million, including five deals with bookings values of $3.0 million or more. In comparison, bookings in the fourth quarter of fiscal 2006 were $112.6 million, including nine deals with bookings values of $3.0 million or more.
Management regards the volume of 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 our revenues, and they are subject to a number of risks and uncertainties, including those described in Item 1A â€śRisk Factorsâ€ť, above, concerning timing and contingencies affecting product delivery and performance. Although many of our contracts have fixed noncancelable terms, some of our contracts are terminable by the client on short notice or without notice.
Accordingly, we do not believe it is appropriate to characterize all of our bookings as backlog that will generate future revenue.
Our revenues derived from clients outside the United States continue to grow, and may in the future grow more rapidly than our revenues from domestic clients. International revenues totaled $240.5 million, $230.2 million and $201.5 million in fiscal 2007, 2006 and 2005, respectively, representing 29%, 28% and 25% of total consolidated revenues in each of these years. In addition to clients acquired via our acquisitions, we believe that our international growth is a product of successful relationships with third parties that assist in international sales efforts and our own increased sales focus internationally, and we expect that the percentage of our revenues derived from international clients will increase in the future.
In March 2007, we sold the assets and products associated with our mortgage banking solutions product line, which was included in the Strategy Machines Solutions segment, for $15.8 million in cash. We recognized a $1.5 million pre-tax gain, but a $0.4 million after-tax loss on the sale due to goodwill associated with the product line that was not deductible for income tax purposes. For fiscal 2007 and 2006, we recorded revenues from the mortgage banking solutions product line of $7.7 million and $19.9 million, respectively. The earnings contribution from the mortgage banking solutions product line was not significant to our fiscal 2007 or fiscal 2006 results of operations.
Our reportable segments are: Strategy Machine Solutions, Scoring Solutions, Professional Services and Analytic Software Tools. Although we sell solutions and services into a large number of end user product and industry markets, our reportable business segments reflect the primary method in which management organizes and evaluates internal financial information to make operating decisions and assess performance. Comparative segment revenues, operating income, and related financial information for the years ended September 30, 2007, 2006 and 2005 are set forth in Note 17 to the accompanying consolidated financial statements.
Fiscal 2007 Revenues Compared to Fiscal 2006 Revenues
Strategy Machine Solutions segment revenues decreased $14.0 million due partially to the sale of our mortgage banking solutions product line, which resulted in a $10.9 million decline in segment revenues. In addition, segment revenues declined due to a $5.5 million decrease in revenues from our customer management solutions , a $5.5 million decrease in revenues from our originations solutions, a $4.0 million decrease in revenues from our insurance and healthcare solutions and a $0.5 million decrease in revenues from our other strategy machine solutions. The revenue decrease was partially offset by a $9.5 million increase in revenues from our collection and recovery solutions, a $1.6 million increase in revenues from our consumer solutions and a $1.3 million increase in revenues from our fraud solutions .
The decrease in customer management solutions revenues was the result of a decline in transactional-based revenues due to the loss of volumes from a significant customer, which resulted from industry consolidation. The decrease in originations solutions revenues was the result of a decline in transactional-based revenues, unfavorable pricing on a renewed customer contract and, to a lesser extent, a reduction in sales of software licenses. The decrease in insurance and healthcare solutions revenues was attributable primarily to a decline in bill review volumes associated with our existing customer base and loss of customer accounts. The increase in collections and recovery solutions revenues was attributable primarily to several large license sales and increased volumes associated with transactional-based agreements. The large license sales resulted from successful international sales efforts. The increase in consumer solutions revenues was attributable to increases in revenues derived from myfico.com and our strategic alliance partners. The increase in fraud solutions revenues was attributable primarily due to increased volumes associated with transactional-based agreements. However, we have experienced a delay in a product upgrade, which impacted current year bookings and revenues and may continue to impact fraud solutions bookings and revenues in future periods.
Scoring Solutions segment revenues increased $3.3 million primarily due an increase in revenues derived from risk scoring services at the credit reporting agencies. We also had an increase in revenues derived from our FICO Â® Expansion Â® score product, which provides scores on U.S. consumers who do not have traditional FICO Â® scores because they do not have a sufficient number of credit accounts being reported to the credit reporting agencies. The revenue increase was partially offset by a decline in revenues derived from our own prescreening and account management services sold directly to users, which resulted from increased pricing pressures and an unfavorable impact on pricing from the merger of two customers. We expect that continued pricing and competitive pressures will adversely affect segment revenues in fiscal 2008.
During fiscal 2007 and 2006, revenues generated from our agreements with Equifax, TransUnion and Experian collectively accounted for approximately 19% and 18%, respectively, of our total revenues, including revenues from these customers that are recorded in our other segments.
Professional Services segment revenues increased $1.8 million from consulting and implementation services for customer management products, for services to develop predictive models for a large customer and implementation services for Blaze Advisor. The increase was partially offset by a decline in implementation services for our collection and recovery products and fraud products and a decline in industry consulting services. The decline in implementation services for fraud products was partially the result of a delay in a product upgrade.
Analytic Software Tools segment revenues increased $5.7 million primarily due to an increase in sales of perpetual and term licenses of Blaze Advisor and to a lesser extent sales of Model Builder software applications. This increase reflects a larger number of Blaze Advisor license sales that exceeded $1.0 million in the United States and EMEA region. The increase in revenues was also partially the result of higher maintenance revenues, which resulted from the overall growth in our installed base of Blaze Advisor.
MANAGEMENT DISCUSSION FOR LATEST QUARTER
Quarter Ended June 30, 2008 Compared to Quarter Ended June 30, 2007 Revenues
Strategy Machine Solutions segment revenues decreased $9.3 million due to a $3.6 million decline in revenues from our collections and recovery solutions, a $2.9 million decrease in revenues from our fraud solutions , a $2.5 million decrease in revenues from our marketing solutions and a $1.1 million net decrease in revenues from our other strategy machine solutions. The revenue decline was partially offset by a $0.8 million increase in revenues from our originations solutions .
The decrease in collections and recovery solutions revenues was due to a decline in license sales. The decrease partially reflects the timing of license sales, which includes large individual contracts. The decrease in fraud solutions revenues was attributable primarily to a large license sale that occurred in the prior year quarter and a decline in volumes associated with transactional-based agreements. In addition, we have experienced a delay in a product upgrade, which impacted current year bookings and revenues and may continue to impact fraud solutions bookings and revenues in future periods. The decrease in marketing solutions revenues was attributable primarily to a decline in sales volumes resulting from the loss last year of a large customer and pricing pressures.
Scoring Solutions segment revenues decreased $9.7 million primarily due to a reduction in prescreen revenues derived from the credit reporting agencies, which resulted from a decline in volumes. Revenues were also impacted by a reduction in revenues from our services sold directly to users, which resulted from increased pricing pressures and a decline in volumes due to a decrease in prescreening initiatives by our customers. In addition, revenues in the current quarter were adversely impacted by a true-up of royalty fees with one of the reporting agencies. We expect that competitive pricing pressures as well as reduced volumes due to weakness in the U.S. financial credit market will continue to adversely affect segment revenues in fiscal 2008.
During the quarters ended June 30, 2008 and 2007, revenues generated from our agreements with Equifax, TransUnion and Experian, collectively accounted for approximately 18% and 21%, respectively, of our total revenues, including revenues from these customers that are recorded in our other segments.
Professional Services segment revenues increased $4.0 million due to an increase in implementation services for our collection and recovery solutions products and Blaze Advisor. We also had increased revenues from fraud consulting services. The increase was partially offset by a decline in revenues from development of predictive models.
Analytic Software Tools segment revenues increased $1.7 million primarily due to sales of products acquired in our acquisition of Dash Optimization Ltd. and an increase in maintenance revenues. The increase in maintenance revenues was due to growth in our installed base of Blaze Advisor software applications. Revenues also increased on sales of model builder products.
Nine Months Ended June 30, 2008 Compared to Nine Months Ended June 30, 2007 Revenues
Strategy Machine Solutions segment revenues decreased $12.8 million due in part to the sale last year of our mortgage banking solutions product line, which contributed $7.1 million of segment revenues in the prior year nine-month period. In addition, segment revenues declined due to a $6.0 million decrease in revenues from our marketing solutions, a $2.5 million decline in revenues from our customer management solutions, a $1.6 million decrease in revenues from our fraud solutions and a $1.0 million net decrease in revenues from our other strategy machine solutions. The revenue decline was partially offset by a $3.0 million increase in revenues from our collections and recovery solutions and a $2.4 million increase in revenues from our consumer solutions .
The decrease in marketing solutions revenues was attributable primarily to a decline in sales volumes resulting from the loss last year of a large customer and pricing pressures. The decrease in customer management revenues was due to a decline in license sales . The decrease in fraud solutions revenues was attributable primarily to a large license sale that occurred in the prior year period and a decline in volumes associated with transactional-based agreements. The increase in consumer solutions revenues was attributable to increases in revenues derived from myFICO.com as a result of increased volumes. The increase in collections and recovery solutions revenues was due to an increase in license sales that resulted from successful international sales efforts.
Scoring Solutions segment revenues decreased $14.9 million primarily due to a reduction in revenues derived from our prescreening and account management services sold directly to users, which resulted from increased pricing pressures and a decline in volumes due to a decrease in prescreening initiatives by our customers. Revenues were also impacted by a decline in prescreen revenues derived from the credit reporting agencies. In addition, revenues in the current period were adversely impacted by a true-up of royalty fees with one of the reporting agencies. We expect that competitive pricing pressures as well as reduced volumes due to weakness in the U.S. financial credit market will continue to adversely affect segment revenues in fiscal 2008.
During the nine months ended June 30, 2008 and 2007, revenues generated from our agreements with Equifax, TransUnion and Experian collectively accounted for approximately 19% of our total revenues, including revenues from these customers that are recorded in our other segments.
Professional Services segment revenues increased $3.8 million due to an increase in implementation services for our collection and recovery, customer management and Blaze Advisor products. The decrease was partially offset by a decline in implementation services for our origination products.
Analytic Software Tools segment revenues increased $5.1 million primarily due to an increase in sales of Blaze Advisor and model builder licenses, sales of products acquired in our acquisition of Dash Optimization Ltd. and increased maintenance revenue. The increase partially reflects the timing of Blaze Advisor sales, which includes large individual contracts. The increase in maintenance revenues was due to growth in our installed base of Blaze Advisor software applications.
Cost of Revenues
Cost of revenues consists primarily of employee salaries and benefits for personnel directly involved in creating, installing and supporting revenue products; travel and related overhead costs; costs of computer service bureaus; internal network hosting costs; amounts payable to credit reporting agencies for scores; software costs; and expenses related to our consumer score services through myFICO.com.
Cost of revenues as a percentage of revenues was 38% in the quarter ended June 30, 2008, as compared to 33% for the quarter ended June 30, 2007. The increase was driven by a decline in sales of our higher margin scoring solutions products and an increase in professional services projects, which generally have much lower profit margins. The quarter over quarter increase of $3.4 million in cost of revenues resulted from a $3.2 million increase in personnel and other labor-related costs and a $1.2 million increase in facilities and infrastructure costs, partially offset by a $1.0 million decrease in other costs. The increase in personnel and other labor-related costs was attributable primarily to an increase in salary and related benefit costs, which included the impact of annual staff salary increases, and an increase in third party staffing costs to support implementation and consulting services. The increase in facilities and infrastructure costs resulted from an increase in allocated costs associated with an increase in professional services activities.
The year-to-date period over period increase of $15.8 million in cost of revenues resulted from a $9.2 million increase in personnel and other labor-related costs, a $3.1 million increase in facilities and infrastructure costs, a $1.7 million increase in third-party software and data, a $1.7 million increase in travel costs and a $0.1 million increase in other costs. The overall increase in cost of revenues for the year-to date period was attributable to the same factors that affected the quarter over quarter comparison.
Over the next several quarters, we expect that cost of revenues as a percentage of revenues will be consistent with, or slightly lower than that incurred during the nine months ended June 30, 2008.
Research and Development
Research and development expenses include the personnel and related overhead costs incurred in development of new products and services, including primarily the research of mathematical and statistical models and the development of new versions of Strategy Machine Solutions and Analytic Software Tools.
The quarter over quarter increase of $1.9 million in research and development expenditures was attributable to a $1.2 million increase in personnel and related costs and a $0.7 million increase in other costs. The increase in personnel and related costs was driven by additional staff to support product development initiatives and costs associated with annual salary adjustments. The increase was partially offset by a shift of employees to lower cost non-U.S. locations.
The year-to-date period over period increase of $7.2 million in research and development expenditures was attributable primarily to a $5.5 million increase in personnel and related costs, a $0.9 million increase in facilities and infrastructure costs and a $0.8 million increase in other costs. The increase in personnel and related costs was driven by additional staff to support product development initiatives and costs associated with annual salary adjustments. The increase was partially offset by a shift of employees to lower cost non-U.S. locations. The increase in facilities and infrastructure costs was attributable primarily to an increase in allocated facility and information system costs associated with increased development activities.
Over the next several quarters, we expect that research and development expenditures as a percentage of revenues will be consistent with or slightly greater than that incurred during the nine months ended June 30, 2008, primarily as a result of continued product development associated with decision management applications.
Selling, General and Administrative
Selling, general and administrative expenses consist principally of employee salaries and benefits, travel, overhead, advertising and other promotional expenses, corporate facilities expenses, legal expenses, business development expenses, and the cost of operating computer systems.
The quarter over quarter decrease of $9.7 million in selling, general and administrative expenses was attributable to a $7.9 million decrease in personnel and other labor-related costs, a $1.5 million decrease in travel costs, a $1.0 million decrease in facilities and infrastructure costs partially offset by a $0.7 million net increase in other expenses. The decrease in personnel and labor-related costs related primarily to lower sales commissions which resulted from the decline in revenues, lower share-based compensation expense and a decline in salary and benefit costs resulting from staff reductions and a shift in resources to product development initiatives. The decline in share-based compensation was due to an overall decline in share-based grants and an increase in forfeitures. The decline in travel costs was driven by management programs focused on reducing discretionary expenses.
The year-to-date period over period decrease of $15.8 million in selling, general and administrative expenses was attributable to a $14.5 million decrease in personnel and other labor-related costs, a $3.5 million decrease in facilities and infrastructure costs and a $0.5 million net decrease in other expenses. The decline was partially offset by a $2.7 million increase in legal fees, primarily associated with the VantageScore litigation. The decrease in personnel and labor-related costs resulted primarily from lower incentive costs, a decline in share-based compensation expense and lower sales commissions. The decline in share-based compensation was due to an overall decline in share-based grants and an increase in forfeitures. The decrease in facilities and infrastructure costs was attributable primarily to a decline in allocated costs resulting from a reduction in general and administrative activities.
Over the next several quarters, we expect that selling, general and administrative expenses as a percentage of revenues will be consistent with or slightly lower than, that incurred during the nine months ended June 30, 2008.
Amortization of Intangible Assets
Amortization of intangible assets consists of amortization expense related to intangible assets recorded in connection with acquisitions accounted for by the purchase method of accounting. Our definite-lived intangible assets, consisting primarily of completed technology and customer contracts and relationships, are being amortized using the straight-line method or based on forecasted cash flows associated with the assets over periods ranging from two to fifteen years.
The quarter over quarter decline of $1.0 million in amortization expense was attributable to certain intangible assets associated with our fiscal 2002 acquisition of HNC Software Inc., becoming fully amortized last fiscal year. The decline was partially offset by amortization recorded in connection with intangible assets acquired in our acquisition of Dash Optimization, Ltd.
The year-to-date period over period decline of $6.1 million was attributable to the same factors that affected the quarter over quarter comparison.
We test goodwill for impairment at the reporting unit level at least annually during the fourth quarter of each fiscal year and more frequently if impairment indicators are identified. Historically, we have had strong operating results and have determined that the carrying value of goodwill was not impaired. With the current weakness in the U.S. financial credit market, which primarily impacts our Strategy Machine Solutions and Scoring Solutions reporting units, we will continue to carefully monitor the performance of each of our reporting units using a more likely-than-not criteria for potential goodwill impairment each quarter.
During the quarter ended June 30, 2008, we recognized a charge of $1.3 million to vacate excess leased space located in California. The charge represents future cash lease payments, net of sublease income, which will be paid out over the next five years. We also eliminated 43 positions and incurred charges of $0.9 million for severance costs, which will be primarily paid in the fourth quarter of 2008.
During quarter ended March 31, 2008, we eliminated 190 positions across the company and incurred charges of $5.3 million for severance costs. Cash payments for the severance costs were paid during the third quarter of fiscal 2008. We also recognized a $0.8 million charge associated with vacating excess leased space located in Colorado. The charge represents future cash lease payments, net of sublease income, which will be paid out over the next three years.
Gain on Sale of Product Line Assets
In March 2007, we completed the sale of the assets and products associated with our mortgage banking solutions product line for $15.8 million in cash. We recognized a $1.5 million pre-tax gain on the sale.
Interest income is derived primarily from the investment of funds in excess of our immediate operating requirements. The quarter over quarter decrease in interest income of $1.7 million was attributable to a decline in cash and marketable security investments and a decline in interest rates.
For the nine months ended June 30, 2008, compared with the same period last year, interest income declined by $4.3 million. In addition to the factors described for the quarterly periods, the decline in interest income was partially the result of interest income that we recognized in the prior year period associated with the settlement of a state tax examination.
Interest expense recorded during the quarter and nine months ended June 30, 2008 and 2007 relates to our 1.5% Senior Convertible Notes (â€śSenior Convertible Notesâ€ť) and interest associated with borrowing under our revolving credit facility. In addition, interest expense for the quarter and nine months ended June 30, 2008 also included interest on our Senior Notes that were issued in May 2008. The quarter over quarter increase in interest expense of $2.0 million resulted from an increase in borrowings and interest on the Senior Notes, which have a higher weighted average interest rate as compared to our other debt obligations.
For the nine months ended June 30, 2008, compared with the same period last year, interest expense increased by $4.3 million. The increase in interest expense resulted from an increase in average borrowings under our revolving credit facility and interest associated with our newly issued Senior Notes.
We anticipate that noteholders will require us to repurchase all or part of the Senior Convertible Notes as of August 15, 2008. We expect to repay the Senior Convertible Notes with available cash and borrowings under our credit agreement. Accordingly, we expect that interest expense will increase substantially in future periods.
Other Expense, Net
Other expense, net consists primarily of realized investment gains/losses, exchange rate gains/losses resulting from re-measurement of foreign-denominated receivable and cash balances held by our U.S. reporting entities into the U.S. dollar functional currency at period-end market rates, net of the impact of offsetting forward exchange contracts, and other non-operating items.
Other income, net was $1.5 million for the quarter ended June 30, 2008, compared with other income, net of $42,000 for the quarter ended June 30, 2007. The increase was partially due to $0.8 million of dividend income that we recognized in the current quarter. In addition, we recognized a $0.5 million gain on the redemption of $100.0 million of Senior Convertible Notes during the quarter ended June 30, 2008.
Other income, net was $2.1 million for the nine months ended June 30, 2008 compared with other income, net of $80,000 for the nine months ended June 30, 2007. The increase in other income, net was partially due to foreign exchange currency gains of $0.3 million that were recognized in the nine months ended June 30, 2008, compared with foreign exchange currency losses of $0.8 million recorded in the prior year nine-month period. In addition, we recognized gains of $0.9 million on the redemption of $123.7 million of Senior Convertible Notes during the nine months ended June 30, 2008.
Provision for Income Taxes
Our effective tax rate was 33.1% and 35.2% during the quarters ended June 30, 2008 and 2007, respectively, and 34.4% and 35.7% during the nine months ended June 30, 2008 and 2007, respectively. The provision for income taxes during interim quarterly reporting periods is based on our estimates of the effective tax rates for the respective full fiscal year.
Our effective tax rate for the quarter and nine months ended June 30, 2008, was positively impacted by improved operating results in certain foreign jurisdictions, an increase in the manufacturing deduction and tax benefits that had a larger impact on our tax rate due to lower pre-tax income.
The quarter over quarter decrease of $10.0 million in operating income was attributable to a decline in revenues and the impact of restructuring expenses. The decrease in operating income was partially offset by a reduction in segment operating expenses and lower share-based compensation expense. At the segment level, the decline in operating income was driven by decreases of $8.6 million in segment operating income in our Scoring Solutions segment and $5.6 million in segment operating income in our Strategy Machine Solutions segment. These decreases were partially offset by a $3.2 million increase in segment operating income within our Analytical Software Tools segment and a $2.0 million increase in segment operating income in our Professional Services segment. The decrease in Scoring Solutions segment operating income was attributable primarily to a decline in revenues derived from the credit reporting agencies and prescreening services that we provided directly to users. In addition, segment income declined on higher legal expenses. The decrease in Strategy Machine Solutions segment operating income was attributable primarily to a decline in revenues. The decrease in segment income was partially offset by a decrease in operating expenses due to lower sales commissions, lower staff costs resulting from reductions associated with our reengineering plan and lower amortization expense. In our Analytic Software Tools segment, increased segment operating income was due to an increase in sales of licenses for our DM products and a decline in operating expenses. The increase in Professional Services segment operating income was the result of higher revenues, which more than offset increased personnel and third party staff costs that were required to support increased professional services activities.
The year-to-date period over period decrease of $29.3 million in operating income was attributable to a decline in revenues, an increase in segment operating expenses and the impact of restructuring expenses. The decrease in operating income was partially offset by a reduction in share-based compensation expense. At the segment level, the decline in operating income was driven by decreases of $16.5 million in segment operating income in our Scoring Solutions segment, $15.1 million in segment operating income in our Strategy Machine Solutions segment, and $0.5 million in segment operating income in our Professional Services segment. These decreases were partially offset by a $6.1 million increase in segment operating income within our Analytical Software Tools segment. The decrease in Scoring Solutions segment operating income was attributable primarily to a decline in revenues derived from prescreening services that we provide directly to users in financial services and a decline in revenues derived from the credit reporting agencies. In addition, segment income declined on higher legal expenses. The decrease in Strategy Machine Solutions segment operating income was attributable to a decline in revenues and an increase in product development costs. The decrease in segment income was partially offset by lower incentive costs and lower amortization expense. The decrease in Professional Services segment operating income was the result of higher personnel costs to support increased professional service activities, which more than offset the increase in revenues. In our Analytic Software Tools segment, higher segment operating income was due to an increase in sales of licenses for our DM products.
In March 2008, we entered into a definitive agreement for the sale of our Insurance Bill Review business unit. On April 30, 2008, the company completed the sale of the business unit for $14.2 million of cash, which is subject to a final working capital adjustment as defined under the agreement.
We recorded a $4.2 million after-tax loss related to the disposition in our quarter ended March 31, 2008 as the carrying value of the net assets of the business exceeded the sales price. In the third quarter ended June 30, 2008, we recorded a tax benefit of approximately $7.6 million from the sale, which represents tax deductions related to intangible assets of the business that could not be recognized prior to the sale transaction. With the tax benefit, the overall after-tax gain on the sale was $3.4 million.
Capital Resources and Liquidity
Cash Flows from Operating Activities
Our primary method for funding operations and growth has been through cash flows generated from operating activities. Net cash provided by operating activities decreased from $129.2 million during the nine months ended June 30, 2007 to $113.8 million during the nine months ended June 30, 2008. Operating cash flows were negatively impacted by the decline in earnings during the nine months ended June 30, 2008, cash paid for a legal settlement and cash paid for incentive payments that were accrued last year. Operating cash flows were positively impacted by a decrease in trade receivables of $13.6 million, which resulted from the timing of cash receipts and improvements made to our collections process.
Cash Flows from Investing Activities
Net cash used in investing activities totaled $26.6 million during the nine months ended June 30, 2008, compared to net cash provided by investing activities of $11.1 million in the nine months ended June 30, 2007. The change in cash flows from investing activities was primarily attributable to $33.3 million of cash paid for the acquisition of Dash Optimization Ltd., $14.2 million of cash we received from the sale of our Insurance Bill Review business unit, $13.9 million of cash received last year from the sale of our mortgage banking solutions product line, a $16.1 million decrease in proceeds from sales and maturities of marketable securities, net of purchases, and a $10.0 million investment we made last year in a company that is developing predictive analytic solutions for healthcare providers.
Cash Flows from Financing Activities
Net cash used by financing activities totaled $80.0 million in the nine months ended June 30, 2008, compared to net cash used by financing activities of $126.8 million in the nine months ended June 30, 2007. The change in cash flows from financing activities was primarily due to a $165.8 million decrease in common stock repurchased, a $132.0 million net repayment of borrowings under our revolving credit facility and a $57.7 million decrease in proceeds from the issuance of common stock under employee stock plans. We also repurchased $123.7 million of our senior convertible notes in the open market and issued $275 million of Senior Notes. Proceeds from the issuance of Senior Notes were used to reduce the amount outstanding under our revolving credit facility and repurchase Senior Convertible Notes.
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 companyâ€™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 Isaacâ€™s discretion. Any future functionality, features, or enhancements discussed today are Fair Isaacâ€™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.
Thank you John and thanks to all of you for joining todayâ€™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 Isaacâ€™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. Itâ€™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.
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 facilitiesâ€™ 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 quarterâ€™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.
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 Iâ€™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 borrowerâ€™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. Iâ€™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 analyticâ€™s work in partnership with Conantâ€™s formerly known as HAI and for retail industry, where our product is called â€śBest next actionâ€ť and in insurance industry where our product is called â€śMulti-line Claims Fraud.â€ť
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.