Fair, Issac in growth mode: software firm's products help financial institutions boost returns and generate business - & Co

Money Digest, Sept, 1999 by Patrick McKeough

Fair, Isaac & Co. (NYSE: FCI; Recent price: U.S.$38.00; Rating: average) provides products and services worldwide to help businesses make better decisions on customer creditworthiness.

Its main business is software that lets creditors use information about a customer to calculate a credit score. That score lets credit providers such as banks decide if they should give a customer a mortgage, a loan or a line of credit. Fair, Isaac also makes software for auto and homeowner insurance risk assessment, and for firms to analyze customer databases for cross-selling of other products and services such as additional lines of credit.

Businesses use Fair, Isaac's products because they improve results and boost profits. Faster turnaround times for loan applications let companies compete with rival lenders and win more business. Higher loan approval rates with fewer delinquencies spurs growth. The software also lets companies cut labour costs.

Fair, Isaac posted record revenues in the three months ended March 31, 1999. Sales rose 15.5% to U.S.$68.9 million from U.S.$59.7 million a year earlier. Earnings increased 36% to U.S.$7.5 million (U.S.$0.51 a share), from U.S.$5.5 million, (U.S.$0.38 a share). The improved sales and profits came despite a number of market conditions that held back results. These included bank consolidations and a diversion of technology resources by clients toward Year 2000 problems.

Fair, Isaac spends about 11% of its revenues on research. Its focus on product research and development enables the company to develop technology and software for new industries and new applications. In the past, the company mainly concentrated on customers in the credit-analysis market. A major area of new development for Fair, Isaac is the huge U.S. healthcare industry. This includes products to let hospitals better manage and collect the bills owed by individuals.

Fair, Isaac is also looking to expand into the telecommunications and electronic-commerce industries. The company writes off its high research spending in the year that it's incurred. That lowers immediate profits, but it lays a foundation for future market dominance and long-term growth.

Fair Isaac remains a buy.

This article is extracted from Patrick McKeough's Canadian Stock Pickers Digest (ste. 977, 6021 Yonge St., Toronto M2M 3W2; phone 416-756-0888; fax 756-0379). Mr. McKeough is also director of Second Opinion securities advisory services.