Fair, Isaac Plunges After Profit Alert

After two months of gradual sliding, the share price of Fair, Isaac & Co. took a nosedive last week on a warning about this quarter's earnings.

The San Rafael, Calif.-based company, which sells credit scoring and risk management software, said Wednesday it does not expect to meet fiscal first-quarter earnings expectations of 41 to 45 cents per share. Instead it envisions per-share earnings close to last year's 33 cents.

Fair, Isaac's stock price dropped 20.6% on the news and closed at $32 Wednesday. It was trading at $31.875 late Friday.

Company officials said revenues were growing at a healthy pace, but not as fast as expenses.

"We forecast a higher growth rate than in fact we have been comfortable in producing," said Peter L. McCorkell, senior vice president at Fair, Isaac. "We compounded that by spending money at a rate that suggested we believed that higher revenue forecast."

The stock price dive reflects not fundamental problems with Fair, Isaac but reaction to the company's over-optimism, Mr. McCorkell said. "If we had forecast low- to mid-20s in revenue growth, we wouldn't be having this discussion," he said.

Analysts attributed the company's revenue-gathering shortfall in part to bank consolidation.

Jennifer Scutti, analyst at Prudential Securities, said in a report that several contracts negotiated by Risk Management Technologies, a software developer that Fair, Isaac acquired in June for $46 million, have been lost or scaled back because of mergers.

In addition, the company's use of costly contract labor might be hurting its ability to keep expenses low, said Barbara Smiley, analyst at Meridien Research Inc. of Needham, Mass.

Further, Ms. Scutti said year-2000 projects at banks may be soaking up technology dollars that might have been spent on Fair, Isaac products.

Patrick Burton, analyst at Lehman Brothers, said Fair, Isaac is not the only bank technology vendor hurt by the year-2000 problem, which requires banks and other companies to make costly computer code adjustments to ensure their systems will run smoothly after Dec. 31, 1999.

"The issue of contracts being delayed is definitely a factor for product companies," he said. "They are at risk because they are selling something that people can defer the purchase of while they rewrite their code."

Mr. McCorkell acknowledged banks are devoting more resources to year- 2000 in the near term, but he said this is unlikely to affect Fair, Isaac for long.

"Banks can't put current operations on hold," he said. "At some point they have to say, 'Wait a minute, we still have to run the institution for the next two years.'"

For the time being, though, analysts are less bullish on the company.

Jeffries & Co., a San Francisco-based investment firm, shaved 8 cents off its 41 cent earnings-per-share estimate and downgraded the stock to "accumulate" from "buy."

Prudential Securities also lowered its earnings estimate and rated the stock a "hold" from "buy." In a report, Ms. Scutti said the company's "murky outlook" contributed to the downgrade.

"Difficulties could spill into the next few quarters until the company can reign in expenses," Ms. Scutti wrote.

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