Fair Isaac Corporation (FICO) — Form 10-Q Summary
Reporting period: Quarter and six months ended March 31, 2016 (FICO fiscal Q2 and first half). Dollar amounts below are in millions unless noted.
Business context
FICO provides analytics, software, data-management and credit-scoring products and services. It reports three segments: Applications, Scores and Tools. Banking and consumer credit represented 72% of quarterly revenue and 74% of first-half revenue. International revenue represented 35% and 34%, respectively.
Financial performance
| Metric | Quarter 2016 | Quarter 2015 | Six months 2016 | Six months 2015 |
|---|---|---|---|---|
| Revenue | $206.7 | $207.1 | $406.8 | $396.7 |
| Operating income | $38.5 | $34.4 | $69.4 | $59.3 |
| Operating margin | 18.6% | 16.6% | 17.0% | 14.9% |
| Net income | $23.1 | $18.9 | $42.4 | $33.3 |
| Diluted EPS | $0.72 | $0.58 | $1.31 | $1.01 |
| Operating cash flow | Not separately provided for quarter | $78.3 | $43.3 |
Quarter revenue was nearly flat; first-half revenue rose 3%. Transactional and maintenance revenue grew 9% for the quarter and 10% for the first half, while license revenue fell 46% and 34%, respectively. Cost of revenues declined to 30% of revenue for the quarter and 31% year to date, from 34% in both comparable periods. Implied gross margin increased to about 70% for the quarter and 69% for the first half. The effective tax rate was 28.1% for the quarter and 24.3% for the first half.
Segments: Quarterly Scores revenue increased 22%, driven by consumer services and business-to-business scores; Applications fell 9%, mainly reflecting fewer fraud-solution software sales versus a prior-year quarter with two large deals. Tools rose 4%. First-half Scores grew 25%, while Applications declined 3% and Tools declined 10%; Tools’ prior-year comparison included a one-time customer royalty settlement.
Balance sheet, debt and liquidity
At March 31, 2016, cash and cash equivalents were $85.4, including $72.9 held offshore; current assets were $276.6 and current liabilities $241.3. Total assets were $1,214.9 and stockholders’ equity $425.4. Reported debt was $611.0: $95.0 current maturities and $516.0 long term. This comprised $235.0 outstanding under the $400 million revolving facility and $376.0 carrying value of senior notes. The revolver’s weighted-average rate was 1.815%; FICO reported compliance with debt covenants. Management expected cash, operating cash flows and available credit to cover needs, including a $60.0 senior-note principal payment scheduled for July 2016.
First-half operating cash flow was $78.3. Investing used $7.8, largely capital expenditures; financing used $71.8, including $68.4 of share repurchases. Cash decreased by $0.7 over the period. FICO repurchased approximately 0.7 million shares during the first half, with $50.9 remaining under its authorization, and paid a quarterly dividend of $0.02 per share.
Changes, outlook and risks
- Operating income rose 12% for the quarter and 17% for the first half. Management attributed improvement to lower segment operating costs and stronger Scores performance, partly offset by higher corporate and share-based compensation costs.
- Operating cash flow improved year over year, helped by a $2.6 tax refund versus $24.5 of taxes paid in the prior-year period and lower incentive-related payments. The comparison also reflects the absence of prior-year acquisition spending.
- Management expected cost of revenues as a share of revenue to be consistent with or slightly higher than Q2 levels; R&D share to be consistent with or slightly lower; SG&A share to be consistent; amortization to be consistent with or slightly lower; and net interest expense to be consistent with or lower. No specific full-year revenue or EPS guidance is provided in the supplied filing text.
- Bookings were $132.5 million for the quarter versus $79.6 million a year earlier; bookings yield was 13% versus 30%, and weighted-average term was 55 versus 22 months. Management cautioned that bookings rely on estimates and may differ materially from eventual revenue and timing.
- Key risks include reliance on major credit-reporting-agency distribution relationships and concentrated banking-industry demand; competition, including credit-scoring products developed by the three major bureaus; regulatory, privacy, cybersecurity and data-access risks; lengthy and variable sales cycles; and execution risks in new products, distribution, acquisitions and international markets.
- FICO disclosed customer payment disputes, former-employee compensation claims and other ordinary-course matters; it stated that reasonably possible losses were not material in aggregate. Unrecognized tax benefits were estimated at $5.7 million. No material off-balance-sheet arrangements were reported.
Important facts for investors to verify
- Whether Scores growth and the Experian consumer-score relationship can offset weaker Applications license sales and Tools revenue.
- How much of first-half cash-flow improvement is sustainable given the favorable tax-payment comparison.
- Debt repayment and refinancing plans, covenant headroom, and liquidity after the scheduled July 2016 $60 million payment.
- Bookings conversion, especially the lower quarterly bookings yield and longer estimated recognition term.
- Exposure to bureau and banking-industry concentration, evolving regulation, data availability and security risks.