Fair Isaac Corporation (FICO) — Form 10-Q Summary
Reporting period: Quarter and nine months ended June 30, 2022 (fiscal 2022 third quarter). Dollar amounts are in millions unless otherwise noted. Comparisons are with the prior-year periods or September 30, 2021, as applicable.
Business context and results
FICO provides analytics software and scoring products through its Scores and Software segments. Its software is delivered on-premises and as SaaS; Scores includes business and consumer offerings.
| Metric | Quarter | Nine months |
|---|---|---|
| Revenue | $349.0, up 3% | $1,028.5, up 5% |
| Operating income | $140.6, down 28% | $408.3, up 5% |
| Net income | $93.5, down 38% | $282.8, down 8% |
| Diluted EPS | $3.61, down 30% | $10.63, up 2% |
| Cash from operations | Not separately provided | $364.6, versus $332.1 |
Quarterly operating margin was approximately 40%, compared with 57% a year earlier; the prior-year quarter included a $92.8 million divestiture and asset-sale gain. Nine-month operating margin was approximately 40% in both years, with the prior-year period including $100.1 million of such gains. Diluted EPS comparisons also reflect those prior-year gains.
Revenue mix and operating trends
- Quarter: Scores revenue was $179.4 million, up 4%; Software revenue was $169.6 million, up 2%. Software on-premises and SaaS revenue rose 9% to $142.5 million, while professional services revenue fell 24% to $27.1 million.
- Nine months: Scores revenue rose 10% to $532.6 million. Software revenue was nearly flat at $495.9 million: on-premises and SaaS grew 9% to $418.0 million, offset by a 32% decline in professional services to $78.0 million.
- Management said reported revenue growth excluding the prior-year business divestiture was 7% for the quarter and 10% for the nine months. The divestiture reduced Software revenue by $13.2 million and $45.3 million, respectively.
- Software annual recurring revenue was $560.9 million at June 30, up 9% year over year excluding divestitures; quarterly dollar-based net retention was 108%. Software annual contract value bookings were $19.0 million for the quarter and $56.2 million year to date.
- Three major consumer reporting agencies collectively generated 41% of quarterly revenue and 39% of nine-month revenue. Americas accounted for 84% and 81% of revenue, respectively.
Cash, debt and liquidity
- Cash and cash equivalents were $155.1 million at June 30, down from $195.4 million at September 30, 2021. Cash from operations was $364.6 million for the nine months. Investing activities used $4.4 million; financing activities used $390.3 million.
- Total debt was approximately $1.96 billion, versus $1.26 billion at September 30, 2021. The increase included $550 million of senior notes issued in December 2021. Interest expense, net, rose 87% for the quarter to $18.7 million and 63% year to date to $48.1 million.
- FICO had $380.0 million outstanding on its $600 million revolving facility and $292.5 million on its term loan. It reported compliance with applicable financial covenants. The notes and facility mature in 2026 or 2028; term-loan principal payments are $3.75 million quarterly.
- Management said cash, available revolver capacity and expected operating cash flows should fund working and other capital needs and $15 million of term-loan principal payments over the next 12 months. Current assets were $473.3 million and current liabilities $383.9 million.
- FICO repurchased $1.04 billion of stock during the nine months, including $282.4 million in the quarter. At June 30, $118.8 million remained under the January 2022 repurchase authorization.
Management commentary, risks and unusual items
- Scores growth reflected higher prices and increased unsecured-credit originations, partly offset by lower mortgage originations. Consumer scores revenue also grew. Software platform growth and a shift toward software over services supported the mix; management cited the divestiture of lower-margin Collections and Recovery operations as a factor in improved Software segment margins.
- Quarterly and nine-month operating expenses were affected by lower headcount and the prior-year divestiture. The absence of prior-year sale gains weighed on reported quarterly operating income and net income. Foreign-currency translation reduced comprehensive income by $22.5 million in the quarter and $27.8 million year to date.
- The filing does not provide a specific full-year revenue or earnings guidance figure. Management cautioned that COVID-19 effects and economic conditions remain uncertain. Risk factors include sensitivity to banking, credit and lending activity; customer and consumer-reporting-agency concentration; competition and execution of the FICO Platform strategy; cybersecurity and service interruptions; access to data; and legal, privacy and regulatory changes.
- FICO disclosed customer disputes over amounts owed, former-employee compensation claims and other ordinary-course legal matters. It said it did not have material aggregate exposure for matters with a reasonable possibility of loss. The filing also reports $14.0 million of unrecognized tax benefits at June 30.
Important facts for investors to verify
- Whether Software ARR, platform growth and bookings convert into sustained recognized revenue and cash flow, particularly as professional services declined.
- How revenue and profitability respond to mortgage and other credit-originations trends, interest rates, inflation and broader banking conditions.
- The effect of increased debt and interest costs on cash generation, covenant headroom and planned repurchases.
- The continuing contribution and contract terms of the three major consumer reporting agencies, which together generated a substantial share of revenue.
- Whether prior-year divestiture gains distort comparisons in evaluating underlying operating performance.