Fair Isaac Corporation (FICO) — Q2 FY2020 Form 10-Q
Reporting period: Fiscal quarter and six months ended March 31, 2020. The interim financial statements are unaudited. FICO provides analytics, software, data-management solutions and credit scores.
Financial performance
| Metric | Quarter ended March 31, 2020 | Year-over-year change | Six months ended March 31, 2020 | Year-over-year change |
|---|---|---|---|---|
| Revenue | $308.0 million | +11% | $606.5 million | +12% |
| Operating income | $75.7 million | +56% | $127.6 million | +31% |
| Operating margin | 24.6% | 17.4% prior year | 21.0% | 18.0% prior year |
| Net income | $58.3 million | +75% | $113.2 million | +54% |
| Diluted EPS | $1.94 | $1.10 prior year | $3.76 | $2.42 prior year |
| Operating cash flow | Not separately stated for the quarter | — | $121.9 million | $96.6 million prior year |
Quarterly revenue growth was led by Scores, up 24% to $129.1 million, and Decision Management Software, up 20% to $38.5 million; Applications revenue declined 1% to $140.3 million. For the six months, Scores revenue rose 29%, Decision Management Software rose 14%, and Applications rose 1%. SaaS revenue was $73.6 million for the quarter, up 10%, and $147.3 million for the six months, up 13%.
Quarterly gross margin, using revenue less cost of revenues, was approximately 71%, compared with 69% a year earlier; management attributed the improvement mainly to a greater mix of higher-margin Scores products. Scores segment operating margin was 88% for the quarter and 86% for the six months. Decision Management Software remained loss-making, with a six-month operating loss of $28.3 million, versus $19.0 million a year earlier, reflecting investment in cloud infrastructure and new products.
Cash, debt and liquidity
- Cash and cash equivalents were $109.0 million at March 31, 2020, versus $106.4 million at September 30, 2019; $83.8 million was held outside the U.S.
- Six-month operating cash flow was $121.9 million; investing cash outflow was $15.0 million and financing cash outflow was $100.3 million. Cash increased $2.5 million over the period.
- Debt included $124.0 million outstanding on the $400 million revolving credit facility and $835.0 million face value of senior notes. The notes include $85.0 million due in July 2020, $400.0 million due in 2026 and $350.0 million due in 2028. The revolver expires in 2023.
- FICO reported compliance with its debt covenants and said cash, available revolver borrowings and expected operating cash flows should fund requirements, including the July 2020 note repayment.
- FICO repurchased approximately 0.29 million shares for $96.0 million in the quarter and 0.46 million shares for $156.0 million in the six months. $64.3 million remained authorized under the program at March 31.
Material changes and unusual items
- Quarterly bookings were $84.1 million, down from $105.7 million; six-month bookings were $196.2 million, versus $212.3 million. Bookings are management estimates and may differ from realized revenue.
- Six-month net income benefited from an income tax benefit of $8.9 million, compared with a $3.7 million tax provision a year earlier. Management cited excess tax benefits related to stock awards and stock exercises. The quarterly effective tax rate was 6.7%, compared with 16.5%.
- FICO issued $350 million of 4.00% senior notes in December 2019 and used the proceeds largely to repay revolver borrowings.
- FICO adopted lease accounting Topic 842 in fiscal Q1. At adoption it recognized $89.8 million of operating lease assets and $98.9 million of operating lease liabilities; prior-period balance-sheet figures were not restated.
- Six-month restructuring costs were $3.1 million for elimination of 69 positions; no restructuring expense was recorded in the quarter.
Outlook, commentary and risks
FICO provided no specific numerical revenue or earnings guidance in the supplied filing text. Management said it could not reliably predict the pandemic’s impact on results, financial condition, liquidity or cash flows. As of the filing, it reported no significant operational disruption, but noted early evidence of customer purchasing weakness in Applications and Decision Management Software and warned that lower credit origination volumes could reduce score purchases. It also recorded increased bad-debt expense, including an estimated $2.1 million increase associated with customers and industries affected by COVID-19.
Management was limiting hiring, contracted services, travel and discretionary spending, with further cost actions possible if disruption continued. Key risks include the duration and severity of COVID-19 and its effects on lending and customer demand; long and variable sales cycles; reliance on major credit reporting agency distribution relationships; data access, cybersecurity and regulatory requirements; and competition. Experian accounted for 16% of quarterly revenue, while Equifax and TransUnion together accounted for 18%.
FICO disclosed that the U.S. Department of Justice opened a civil investigation into potential exclusionary conduct on March 13, 2020; the company said it was cooperating. It also reported customer payment disputes, former-employee claims and other ordinary-course legal matters, without material aggregate exposure identified for proceedings with a reasonable possibility of loss.
Important facts for investors to verify
- How COVID-19 affected subsequent bookings, credit-score transaction volumes, customer purchasing decisions and receivable collectability.
- Whether the $85 million senior-note principal payment due in July 2020 was completed and how debt, revolver usage and covenant headroom evolved.
- How much of net-income growth reflects operating performance versus tax benefits from stock compensation.
- Whether bookings converted to revenue as estimated, given the filing’s stated uncertainty in booking assumptions and timing.
- Any developments in the DOJ investigation, customer disputes or other legal contingencies.
- Whether continued Scores growth and cloud expansion offset Applications weakness and Decision Management Software investment losses.