Business context and reporting period
Fair Isaac Corporation (FICO) filed this Form 10-Q for its fiscal third quarter and nine months ended June 30, 2019. FICO provides analytics, software, data management, and credit-scoring products. Its reportable segments are Applications, Scores, and Decision Management Software (DMS). Prior-year comparisons below reflect retrospective adoption of ASC 606 unless otherwise noted.
Financial performance and position
| Metric | Quarter ended June 30, 2019 | Year-over-year change | Nine months ended June 30, 2019 | Year-over-year change |
|---|---|---|---|---|
| Revenue | $314.2 million | +23% | $854.7 million | +15% |
| Operating income | $85.7 million; 27.3% margin | +92%; prior margin 17.5% | $183.3 million; 21.4% margin | +43%; prior margin 17.2% |
| Net income | $64.2 million; 20.4% margin | +116% | $137.5 million; 16.1% margin | +47% |
| Diluted EPS | $2.12 | Compared with $0.95 | $4.54 | Compared with $2.99 |
| Operating cash flow | Not provided for quarter | — | $164.9 million | Compared with $163.1 million |
Quarterly revenue growth was led by Scores (+27%), DMS (+31%), and Applications (+19%). For the nine-month period, segment revenue grew 24% in Scores, 31% in DMS, and 7% in Applications. Scores operating income rose 33% for the quarter and 31% year to date. DMS remained loss-making, with a quarterly operating loss of $8.8 million and a nine-month loss of $27.8 million.
Transactional and maintenance revenue was $226.0 million, professional services revenue $44.6 million, and license revenue $43.6 million for the quarter. SaaS revenue was $69.3 million, up 19%; nine-month SaaS revenue was $199.5 million, up 12%.
At June 30, cash and cash equivalents were $78.8 million; current assets were $435.1 million and current liabilities $457.7 million (current ratio approximately 0.95). Total debt on the balance sheet was approximately $822.6 million, and stockholders’ equity was $268.3 million. The company reported $315 million outstanding on its $400 million revolving facility at a 3.781% weighted-average rate, plus $513 million carrying value of senior notes. It held $61.8 million of cash offshore. Nine-month investing cash outflow was $20.8 million, including $18.2 million of property and equipment purchases; financing cash outflow was $156.1 million. Cash declined $11.2 million from fiscal year-end.
Material changes and management commentary
Higher-margin Scores and software sales helped reduce cost of revenue to 28% of revenue for the quarter from 31% a year earlier; selling, general and administrative expense fell to 33% from 38%. Management attributed stronger operating results chiefly to revenue growth and mix. It expects cost of revenue, R&D, and SG&A as percentages of revenue to be slightly higher over the next several quarters than in the June quarter, and expects net interest expense to remain consistent with that quarter.
Operating cash flow was nearly flat year over year despite higher net income; management cited a $55.8 million adverse change from the timing of ordinary-course receipts and payments. FICO repurchased 780,182 shares for $178.9 million during the nine months. In July 2019, the board authorized a new open-ended repurchase program of up to $250 million, following completion of the prior program.
FICO adopted ASC 606 in fiscal 2019 using the full retrospective method. The change affected the timing of some license and transactional revenue recognition and the gross presentation of certain receivables and deferred revenue. Reported comparisons use restated 2018 figures; for example, ASC 606 reduced previously reported 2018-quarter revenue by $4.5 million and net income by $2.6 million.
Outlook, risks, and contingencies
Management said cash, operating cash flows, and available revolver borrowings should fund working and other capital needs, including a $28 million senior-note principal payment due in July 2019. It reported no other significant debt maturities in the following 12 months. No numerical full-year revenue or earnings guidance is provided in the filing.
Key risks include dependence on banking and consumer-credit markets (88% of quarterly revenue came from banking, including consumer credit), reliance on credit-reporting-agency and other distributor relationships, competition—including a competing score developed by Experian, TransUnion, and Equifax—execution of the cloud-first and Decision Management strategies, data access and privacy regulation, cybersecurity and service interruptions, and variable sales cycles. Experian accounted for 13% of quarterly revenue; Equifax and TransUnion together accounted for 16%.
The company disclosed customer payment disputes, former-employee compensation and employment claims, and other ordinary-course matters; it stated that aggregate exposure for matters with a reasonable possibility of loss was not material. It was in compliance with its debt covenants at June 30. FICO is evaluating the impact of upcoming lease accounting and expected-credit-loss standards; it anticipates lease adoption will increase balance-sheet assets and liabilities.
Investor facts to verify
- How sustainable are the sharp quarterly earnings and margin gains, and what are the expected near-term expense-ratio increases?
- How much of revenue and profit growth depends on Scores pricing, transaction volumes, and major credit-reporting-agency relationships?
- What are the timing, cash-flow effects, and accounting consequences of the July 2019 $28 million debt payment and new $250 million repurchase authorization?
- How will lease-standard adoption affect reported assets, liabilities, and leverage, and what will be the eventual impact of the expected-credit-loss standard?
- How do ASC 606’s revenue-timing changes affect comparisons, deferred revenue, and the conversion of bookings and remaining performance obligations into revenue?