The times seem finally to have caught up to Fair, Isaac & Co.

The California-based company has long been recognized as the pioneer of the mathematical scoring techniques that helped create the global mass market for consumer credit. Now the rewards are piling up.

Data-hungry marketers of credit cards, auto loans, insurance, and other consumer services are flocking to Fair Isaac, increasingly from the emerging and rapidly developing economies of other continents.

The customer list is a Who's Who: American Express and Citicorp, Banc One and Bank-America, Ford and General Motors, Sears and J.C. Penney, Barclays and Deutsche Bank, and scores more. Once in the fold, clients rarely leave.

So many want to get close to Fair Isaac that the company had to turn people away from its international conference last month in San Francisco. It could only accommodate 800.

All this helps explain why revenues, profits, and the stock price are spiraling upward.

The company has caught the proverbial wave, with an industry influence and global reach out of proportion to revenues, which may be hard-pressed to hit $100 million in the current fiscal year. When Fair Isaac's over-the-counter stock hit a 52-week high of $28 last Friday, 23 times earnings, only 6,100 shares changed hands.

Not 'The Old Fair Isaac'

The sophistication and usability of Fair Isaac's analytical and number-crunching tools have converged with the unending search in several industries -- particularly among credit card issuers - for ways to identify and target desirable prospects.

It's not just "market segmentation" any more, and Fair Isaac does not want to be seen as just a provider of scoring models that help control credit risk.

"That was the old Fair Isaac," president and chief executive officer Larry E. Rosenberger said in a recent interview. "We are saying now, 'See us in a different light,' because we have a lot to contribute to the marketing side of institutions.

"Direct marketing is evolving, from niche marketing to one-to-one selling, and with a heavy emphasis on customer retention," Mr. Rosenberger said, implying Fair Isaac is ready to usher customers along that path.

That also means Fair Isaac, with help from a St. Paul, Minn., data base company it acquired in 1992 called DynaMark Inc., is moving into marketing support for deposit, investment, and other noncredit products.

One of the company's mottos, recited mantra-like by Mr. Rosenberger, is "better decisions through data." It clearly strikes a chord in the marketplace.

R&D 'Suffers'

Growth has been so strong that R&D expenditures - on which Fair Isaac, like other technology-oriented growth companies, prides itself -- have not kept pace with revenues. Mr. Rosenberger apologizes, but he's anything but despondent at the fact that revenues climbed 56% in the Sept. 30, 1993, fiscal year, to $66.7 million, and 48% for the half through March 31, to $42 million. As recently as 1990, annual sales were only $25 million.

Research and development may be down from the 9% to 10% of revenues maintained from 1991 to 1993, but Mr. Rosenberger, who once headed the R&D function, said the commitment will not flag.

Mr. Rosenberger has tried to prepare his investors -- including the smart ones who got in at the initial public offering price of $9.50 in 1987 -- for the inevitable return to earth.

With the most recent quarterly earnings report in April, he stated, "For the past nine months we have been working very close to the capacity of our current staff just to keep up with the market demand for our products and services -- even to the point of deferring research and development and training programs."

In another irony-tempered boast, he called attention to the "unusually high" 17.3% profit margin for the first half, compared with 11.9% a year earlier.

"Now we need to focus attention on the internal development necessary to exploit the market opportunities and grow the company at a more sustainable pace," Mr. Rosenberger said. "As we take the steps needed to bring our revenues and capacity growth rates back in sync, we anticipate a period of slower revenue growth and lower margins than recent quarterly results may suggest."


"They're a remarkable story," said H. Robert Heller, the former president of Visa U.S.A., who recently joined the Fair Isaac board. "The vision of one man [William R. Fair, the mathematician who founded the company with the late Earl Isaac and who remains as nonexecutive chairman] changed an industry.

"They struggled for a long time," Mr. Heller said, "but now Fair Isaac is the standard."

That standard, and the market Fair Isaac plays in, are somewhat vaguely defined. Mr. Heller says Fair Isaac's share is 65%; other observers generally agree the company is a dominant force.

Spencer Nilson, the credit card newsletter publisher and one-time Diners Club executive who has followed Fair Isaac from its beginnings in the 1950s, said recently that only a half-dozen companies in the world have achieved prominence in statistical scoring.

In the United States, the main credit scoring competitor is MDS of Atlanta, which recently became the MDS Division of the CCN Group, a British-based information service company. From the U.S. perspective, MDS is much smaller than Fair Isaac, though it has a competitive range of scoring products and comparable alliances with the principal credit-report providers, Equifax, Trans Union, and TRW. MDS has some 150 U.S. employees, while Fair Isaac has 400 just at its San Rafael, Calif., headquarters.

Globally, CCN could be a force for Fair Isaac to reckon with, with $120 million of annual sales and 2,000 employees compared with Fair Isaac's 620.

In a parallel with the credit card processing market, in which service companies like First Data Resources and Total System Services have taken business away from all but the biggest card issuers, Fair Isaac and MDS have pretty much eradicated an older form of competition--banks doing their own mathematical modeling and credit scorecards.

Going It Alone

First Deposit Corp., a San Francisco-based credit card company owned by Providian Corp. that sets out to identify niches and prospects before competitors get wind of them, continues to hone its marketing raw material in-house. In an interview last year, First Deposit chief executive Shailesh Mehta said credit-market data determine competitive advantage, and too many institutions' reliance on Fair Isaac or MDS "commoditizes" the business.

Mr. Rosenberger of Fair Isaac said, "We have heard the argument that vendors are playing-field levelers. We disagree."

"Vigorous competitors will come to us from different positions and ask for different things," Mr. Rosenberger said. "The big competitive advantages are not in the tools, but in the use of the tools."

Mr. Rosenberger is fond of the toolbox analogy. Fair Isaac, he says, will stock the tool box with various credit and behavioral scoring, account and risk management, and processing systems -- they go by brand names like Prescore, ScoreNet, Credit-Desk, and Triad. And Fair Isaac will provide training, consulting, and other support to optimize use of the tools. But Mr. Rosenberger says, it's the user, not the tool, that makes the difference.

"Graphite rackets changed tennis," he analogized further. "But that doesn't mean I can play with John McEnroe.

"We see a startling variation in the use of our tools."

Fair Isaac also plays varying roles with the credit bureaus and other industry service providers. Equifax, TRW, and Trans Union each market Fair Isaac predictive models. Trans Union recently became the first to offer a revenue-predicting tool, which scores prospective credit card customers on their potential interest revenue. An expanded version of Fair Isaac's Search software for credit bureau reports uses Dun & Bradstreet data to help lenders evaluate small-business applications.

In some areas, Fair Isaac finds itself competing against such partners. "TRW, Equifax, and Trans Union are important business alliances for us," Mr. Rosenberger said. "Some will at times offer predictive and analytic techniques. The mindset was different a few years ago, but now I think we all understand that an organization you partner with in one area, you compete with in another."

Physics Major

Mr. Rosenberger, 47 seems to personify Fair Isaac and its unlikely progression from mathematician's brainchild to back-bone of the consumer credit business.

He earned a BS in physics from the University of California at Berkeley in 1968, but in his soul- and career-searching decided he was attracted to mathematics and practical problem-solving. He gravitated toward the field of operations research, and took a master's degree in it, also at Berkeley.

The campus, better known then as a hotbed of political activism, provided Fair Isaac's academic underpinnings and much of its talent. Among its guiding lights was Robert M. Oliver, a retired engineering professor and Fair Isaac director.

Mr. Rosenberger became a protege of Mr. Fair and Mr. Isaac when he saw they were "doing interesting things" to which operations research applied. "Quantitative reasoning for problem-solving and decision-making was the original purpose for operations research," Mr. Rosenberger said.

He joined Fair Isaac in 1974, when it had only 30 employees, and was named vice president in 1977, a director in 1983, executive vice president in 1985, and CEO in 1991.

He can expound at length about the latest advances in statistical predictors, or make a compelling argument that the increasingly popular neural-network solutions to credit card fraud are not the panacea some advocates maintain.

Marketing Commitment

But Mr. Rosenberger can be only a part-time engineering wonk. This is a company that increased sales and marketing expenditures 25% last fiscal year and 43% the year before. It poured 19% of its revenue last year back into sales and marketing, or twice what it spent on R&D. The CEO, with his easy way of communicating on relatively arcane matters, is a natural on the front lines.

He also knows his markets. At last month's conference -- Fair Isaac has run it every other year since '74 and will break the pattern in '95 by holding one in Paris -- he reeled off a litany of market changes ranging from mortgage automation to insurance deregulation in Europe.

Discussing of the Trans Union revenue predictor, he encapsulated the need for it: "The credit card industry is struggling with its product structure to maximize revenues, especially on cobranded products where some revenues are automatically going out the door" to partners.

Playing with Legos

Mr. Rosenberger the strategist has let Fair Isaac run with an eye-catching series of advertisements and support materials that use the imagery of Lego toys with their building-block metaphor. The company makes a commitment to education and training in how to use its tools, supported with numerous books and other printed matter.

With all the data at its disposal, Fair Isaac has chimed in on the loan-bias controversy. General counsel Peter McCorkell and vice president Martin Sleath wrote a white paper, "Lending Discrimination: Outcomes Can Be Deceiving." It points up some contradictions in current policy and suggests an enforcement approach focusing on specific instances of discrimination rather than aggregate outcomes.

The good news about the higher profile is that Fair Isaac is better known and financial analysts like what they see, which is good for working capital. Kenneth Bohringer of Prudential Securities in New York, who initiated coverage in March 1993 with a buy recommendation that is still in place, said the only downside is that Fair Isaac's stock trades in low volumes, and hence has limited appeal to institutional investors.

Political Risk

But Fair Isaac is moving into the fast lane of the information highway, alongside counterparts like Equifax and TRW who know the hazards too well. Congress is on their case about the accuracy and security of personal histories in their credit files.

"We haven't gotten punched in the face the way TRW has," said Mr. Rosenberger, who said he is prepared to do his part on behalf of the consumer information industry. He pointed out that European Union privacy regulations threaten to preclude direct-mail marketing in member countries, which could put a crimp in the strategies of a lot of Fair Isaac clients.

"We have to be keenly interested in these issues, because if you can't use data, what use will our 'making better decisions' be?" Mr. Rosenberger said.

"Fair Isaac has to be in this battle with the rest of us," said Martin Abrams, TRW's chief spokesman on privacy and consumer policy, who is trying to find common ground with Congress and consumer advocates. "If we don't find a way to win on this issue, we all lose."

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