Business context and reporting period
Fair Isaac Corporation (FICO) provides analytics, software, data management and credit-scoring products and services. This unaudited Form 10-Q covers the fiscal quarter and nine months ended June 30, 2015, compared with the corresponding 2014 periods.
Financial performance and position
| Metric | Quarter | Nine months |
|---|---|---|
| Revenue | $209.4 million, up 6% | $606.0 million, up 7% |
| Operating income | $37.1 million, up 2% | $96.3 million, down 13% |
| Net income | $19.9 million, down 3% | $53.2 million, down 9% |
| Diluted EPS | $0.62, versus $0.58 | $1.63, versus $1.65 |
| Operating cash flow | $86.4 million for nine months, versus $103.8 million |
Quarterly revenue growth was led by Scores (up 23%) and Tools (up 18%); Applications revenue declined 2%. For the nine months, revenue rose in all three segments, but operating income fell in Applications and Tools, and Tools reported a $6.7 million operating loss.
Quarterly operating expenses were 82% of revenue versus 81% a year earlier; nine-month expenses were 84% versus 81%. Nine-month cost of revenue rose to 34% of revenue from 31%, reflecting higher consulting delivery costs, personnel and third-party costs. The filing reports no formal revenue or EPS guidance.
At June 30, cash and cash equivalents were $84.4 million, including $51.4 million held offshore. Debt totaled $648.0 million: $272.0 million outstanding on the $400 million revolving facility and $376.0 million in senior notes. Cash declined from $105.1 million at September 30, 2014. The company reported compliance with debt covenants and said cash, operating cash flow and available revolver borrowings should fund needs and scheduled debt repayments for the next 12 months.
Nine-month investing cash outflow was $75.2 million, including $57.0 million paid for acquisitions and $18.3 million of property and equipment purchases. Financing cash outflow was $23.7 million, including $130.7 million of share repurchases. The company had $119.3 million remaining under its $250 million repurchase authorization.
Material changes and unusual items
- FICO acquired TONBELLER, a financial-crime and compliance solutions provider, in January 2015 for $59.6 million. The preliminary allocation included $46.2 million of goodwill; acquired results were included from the acquisition date.
- Scores growth benefited from the Experian agreement launched in December 2014 and increased transactional scoring tied to new originations. The three major credit reporting agencies collectively accounted for 18% of quarterly revenue, versus 14% a year earlier.
- Nine-month bookings were $209.4 million, down from $276.5 million; quarterly bookings were $60.2 million, versus $84.5 million. Management cautions that bookings rely on estimates and are not backlog.
- The quarter included $1.5 million of severance charges for 44 eliminated positions and $0.8 million of TONBELLER acquisition costs. Restructuring cash payments were expected by the end of fiscal Q1 2016.
- Nine-month foreign-currency translation adjustments reduced comprehensive income by $17.7 million. Share repurchases reduced outstanding shares; diluted weighted-average shares fell to 32.4 million for the quarter from 35.2 million.
Outlook, risks and contingencies
Management expected cost of revenue, research and development, and selling, general and administrative expense as percentages of revenue to remain consistent with or slightly below the June 2015 quarter over the following several quarters. It expected amortization to remain consistent with the quarter and net interest expense to be consistent with or slightly lower. The filing provides no specific full-year revenue or earnings forecast.
Management cited growth initiatives in cloud computing and SaaS, the FICO Score Open Access program and financial-crime compliance solutions. It reported more than 69 million consumer accounts with access to a free FICO Score through Open Access and expected that reach to grow to more than 135 million with new participants.
Key disclosed risks include dependence on banking and consumer-credit markets, a limited number of major customers and distribution partners, competition (including competing scores developed by the major credit bureaus), economic and regulatory changes, access to data, cybersecurity, product execution, long sales cycles, international exposure and acquisition integration. Customer payment disputes, former-employee claims and other ordinary-course legal matters were disclosed; FICO said it did not believe reasonably possible losses were material in aggregate. Unrecognized tax benefits were estimated at $5.2 million.
Disclosure controls were assessed as effective, and no material change in internal control over financial reporting was identified.
Important facts for investors to verify
- Whether the sharp year-over-year decline in bookings translates into weaker future revenue, given booking-estimation uncertainty and contract terms.
- Whether margin pressure—particularly in Applications and Tools and from higher service-delivery costs—persists as revenue grows.
- TONBELLER integration, final purchase-price allocation and the returns expected from the acquisition.
- Debt repayment needs, revolver availability, covenant headroom and the effects of continued share repurchases on liquidity.
- Exposure to the three credit reporting agencies, banking-sector concentration, regulatory developments and data-security risks.