Fair Isaac Corporation (FICO) — Form 10-Q
Reporting period: Fiscal second quarter and six months ended March 31, 2012; comparison with the corresponding 2011 periods. FICO provides analytics, scoring, software and decision-management solutions. Amounts below are in millions unless noted.
Financial performance
| Metric | Quarter 2012 | Quarter 2011 | Six months 2012 | Six months 2011 |
|---|---|---|---|---|
| Revenue | $159.5 | $152.8 | $329.9 | $308.8 |
| Operating income | $38.2 | $19.2 | $90.3 | $48.8 |
| Net income | $20.0 | $7.7 | $50.0 | $23.8 |
| Diluted EPS | $0.55 | $0.19 | $1.36 | $0.59 |
| Operating margin | 24.0% | 12.6% | 27.4% | 15.8% |
| Net margin | 12.5% | 5.1% | 15.2% | 7.7% |
- Quarter revenue rose 4%; six-month revenue rose 7%. Quarterly growth came primarily from Scores (+8%) and Tools (+19%), while Applications was essentially flat. Six-month segment revenue increased in Applications (+7%), Scores (+6%) and Tools (+9%).
- Six-month revenue mix included transactional and maintenance of $229.0, professional services of $59.2 and license revenue of $41.7. Applications’ six-month license growth reflected two large multi-year fraud-solutions contracts. Second-quarter Scores growth included a large, non-recurring customer project.
- Operating income increased substantially, aided by lower costs and the absence of prior-year restructuring charges ($11.5 in the quarter; $12.4 for six months). Six-month R&D expense fell 21%; operating expenses overall fell 8% despite higher revenue.
- Cash from operations was $83.5 for six months, versus $59.6 in 2011. Investing activities provided $47.0; financing used $121.4, mainly reflecting $156.8 of stock repurchases. Cash and cash equivalents increased $10.3 to $146.0.
Balance sheet, debt and liquidity
- At March 31, cash, cash equivalents and marketable securities totaled approximately $196.1, versus $245.7 at September 30, 2011. Current assets were $315.3 and current liabilities $142.2.
- Senior notes had a reported carrying value of $512.0, including $8.0 in current maturities; no borrowings were outstanding under the $200 million revolving credit facility. FICO reported compliance with debt covenants. The facility expires in September 2016; management cited no significant debt maturities until May 2013.
- Management said cash and investments, available credit and expected operating cash flow should cover working and other capital needs and scheduled debt repayments over the next 12 months. Total liabilities were $667.4 and stockholders’ equity $413.2.
- FICO repurchased 4.35 million shares for $150.3 during the six months; $34.2 remained under the November 2011 authorization at March 31. It paid a quarterly dividend of $0.02 per share.
Changes, outlook and risks
- Bookings were $78.4 for the quarter, up from $57.7; six-month bookings were $137.6, down from $141.7. Bookings are management estimates, not backlog, and depend in part on estimated transaction volumes, active accounts and service hours. Quarterly bookings yield was 24%, versus 29% a year earlier.
- Management described lending activity as stabilized in many markets but not yet showing strong growth, and expected consumer lending growth to lag the broader recovery. It cited continued expense management and strategic resource allocation. No specific full-year revenue or earnings guidance is provided in the supplied filing text.
- Management expected cost of revenue, R&D, SG&A, amortization and interest expense over the next several quarters to be consistent with second-quarter levels or ratios. It expected to continue the current dividend rate, subject to Board review.
- The effective tax rate increased to 32.6% for the quarter and 31.8% for six months, from 29.8% and 26.8%. FICO attributed the increase to the expired federal R&D credit and a one-time entity restructuring charge in the first half of fiscal 2012.
- Other expense included a one-time vendor termination fee; six-month expense also reflected increased foreign-currency losses. FICO uses short-term currency forwards to manage certain exposures and reported no fair value for the contracts at period-end.
- Key risks include economic and financial-sector conditions, reliance on major customers and the three credit bureaus, competition (including bureau-developed scoring products), access to data, regulatory and privacy requirements, execution of the Decision Management strategy, and sales-cycle and revenue-estimation variability. Customer and former-employee disputes and other ordinary-course claims were disclosed; FICO said it did not expect a material adverse effect, but potential liability amounts could not be determined with certainty.
Important facts for investors to verify
- How much future revenue depends on the two large multi-year license deals and the non-recurring Scores project, and whether bookings convert to recognized revenue as estimated.
- Whether operating-income improvement persists absent the prior-year restructuring charge, and how expense reductions affect growth and product investment.
- Repurchase pace, remaining authorization, share-count effects, and the cash-flow implications alongside $512.0 million of senior-note carrying value.
- Customer and distribution-partner concentration, especially the credit bureaus, and any changes in relationships or competitive offerings.
- Exposure to slower lending activity, foreign markets and currencies, regulatory changes, and possible legal or tax developments.