Fair Isaac Corporation (FICO) — FY2018 Form 10-K
Reporting period: Fiscal year ended September 30, 2018. The filing also reports the quarter ended September 30, 2018 (FY2018 Q4). FICO provides analytics, decision-management software and credit scores to businesses and consumers.
Financial performance and liquidity
| Metric | FY2018 | FY2017 | Change |
|---|---|---|---|
| Revenue | $1,032.5 million | $932.2 million | +11% |
| Operating income / margin | $206.4 million / 20% | $177.2 million / 19% | +16% |
| Net income | $142.4 million | $128.3 million | +11% |
| Diluted EPS | $4.57 | $3.98 | +15% |
| Operating cash flow | $223.1 million | $225.6 million | Down $2.5 million |
- FY2018 Q4: Revenue was $279.8 million, versus $253.2 million a year earlier; net income was $50.5 million versus $40.0 million; diluted EPS was $1.64 versus $1.25. The filing does not provide clear Q4 operating income or operating cash flow figures.
- FY2018 cash and cash equivalents were $90.0 million, including $75.9 million held by foreign subsidiaries. Working capital was negative $83.7 million, compared with negative $15.7 million in FY2017.
- At year-end, debt principal comprised $513 million in senior notes and $257 million drawn on the revolving facility. The revolver had $400 million capacity and matures in 2023. The company reported compliance with debt covenants. FY2018 net interest expense was $31.3 million, up from $25.8 million.
- Cash used in investing was $14.1 million; cash used in financing was $218.6 million. FICO repurchased approximately 1.9 million shares for $336.9 million during FY2018 and had $199.3 million remaining under its then-current $250 million authorization. Cash dividends were discontinued in May 2017.
Segments and material changes
- Scores: Revenue rose 29% to $342.6 million; segment operating income increased 32% to $279.2 million. Mortgage-originations scoring benefited from higher unit pricing, alongside growth in account-management and prescreen volumes.
- Applications: Revenue grew 6% to $585.6 million, driven principally by customer communications and SaaS-based originations. Segment operating income rose 3% to $164.6 million.
- Decision Management Software: Revenue declined 7% to $104.3 million, primarily from lower Blaze Advisor license revenue. Segment operating loss widened to $30.6 million from $10.8 million, reflecting lower higher-margin license sales and continued cloud and product investment.
- Cloud bookings represented 35% of total bookings, up from 24%. Cloud revenue was $241.5 million, or 35% of non-Scores revenue, compared with $202.7 million, or 30%, in FY2017.
- Revenue from Experian was 11% of total, while TransUnion and Equifax together accounted for 14%, versus 9% and 11%, respectively, in FY2017. Transactional and unit-based arrangements represented 74% of revenue, up from 70%.
Outlook, commentary and risks
- Management expected FY2019 cost of revenue as a percentage of revenue and SG&A as a percentage of revenue to remain consistent with FY2018; R&D as a percentage of revenue was expected to be consistent or slightly higher. Net interest expense was expected to increase, and intangible amortization to be slightly lower. No specific revenue or EPS guidance is provided in the supplied filing text.
- Management said cash, the $400 million revolver and expected operating cash flows should cover working capital, other capital needs and the $28 million principal payment due in July 2019.
- The Tax Cuts and Jobs Act raised FY2018 tax expense: the effective tax rate was 24.3%, versus 15.2% in FY2017. FICO recorded a $14.0 million deferred-tax remeasurement charge and a provisional net $9.6 million charge for other Tax Act effects; the latter accounting was not complete and could be revised.
- FICO identified dependence on a concentrated set of products, large customers and credit-bureau distribution partners; intense competition, including from its bureau partners; reliance on access to data; and privacy, cybersecurity, regulatory, cloud execution and economic risks. Banking and insurance were the principal end markets, and 34% of FY2018 revenue came from outside the U.S.
- FY2018 bookings were $437.3 million versus $429.0 million, but management cautioned bookings are estimates, depend on future volumes and contract assumptions, and should not be treated as backlog.
- FICO adopted the new revenue standard effective October 1, 2018 using full retrospective application. It estimated the standard would reduce FY2018 revenue by approximately $32.3 million and increase FY2017 revenue by approximately $2.8 million on a restated basis, mainly from changes in license-revenue timing.
- The auditor gave unqualified opinions on the financial statements and internal control over financial reporting. FICO reported no material legal exposure in aggregate for proceedings with a reasonable possibility of loss.
Investor verification priorities
- Review the FY2018 revenue and earnings impact of the new revenue standard against reported results, and the resulting restated comparative periods.
- Assess whether Scores growth—particularly mortgage-related pricing and volumes—is sustainable, and monitor the widening Decision Management Software operating loss.
- Track bureau-partner concentration, distribution terms and competitive offerings, as well as customer and industry concentration.
- Reconcile debt maturities, revolver usage, negative working capital and cash available outside the U.S.; monitor covenant headroom and planned repurchases.
- Follow final Tax Act accounting and subsequent effective tax rates, along with privacy, data-access, cybersecurity and cloud-transition risks.