Fair Isaac Corporation (FICO) — FY2011 Form 10-K
Reporting period: Fiscal year ended September 30, 2011. The filing also reports the quarter ended September 30, 2011; it is not a standalone quarterly filing. Amounts are in U.S. dollars unless stated otherwise.
Business context and reporting period
FICO provides predictive analytics, credit scores and decision-management software and services. Its reportable segments are Applications, Scores and Tools. Banking and insurance accounted for 78% of FY2011 revenue; 37% of revenue came from international customers. Revenue from agreements with Equifax, TransUnion and Experian collectively represented 18% of the total.
Key financial metrics
| Metric | FY2011 | FY2010 |
|---|---|---|
| Revenue | $619.7 million | $605.6 million |
| Operating income / margin | $127.3 million / 20.5% | $113.3 million / 18.7% |
| Net income | $71.6 million | $64.5 million |
| Diluted EPS | $1.79 | $1.42 |
| Net cash from operating activities | $136.2 million | $105.8 million |
| Cash, cash equivalents and marketable securities | $241.6 million | $219.2 million |
| Working capital | $218.0 million | $225.0 million |
| Senior notes, principal | $512.0 million | $520.0 million |
| Revolver borrowings | None; $200 million facility available | None |
FY2011 cost of revenue was 30% of revenue, implying a gross margin of approximately 70% before separately reported intangible amortization. Net margin was approximately 11.5%. FICO paid $0.08 per share in dividends during the year and spent $96.3 million on share repurchases.
For the September 2011 quarter, revenue was $160.2 million, net income was $24.6 million, and diluted EPS was $0.64.
Material changes versus the prior comparable period
- Revenue increased 2% year over year. Applications revenue rose 4%, led by fraud and origination solutions; Tools revenue increased 3%; Scores revenue declined 2%.
- Operating income increased 12%, and operating margin improved to 20.5% from 18.7%. Net income rose 11%; diluted EPS increased from $1.42 to $1.79, supported in part by a lower average share count following repurchases.
- Operating cash flow improved by $30.4 million to $136.2 million, with working-capital movements contributing to the change.
- Interest expense rose 34% to $32.4 million, primarily reflecting the interest rate on the July 2010 notes relative to prior revolver borrowings. Total senior-note principal declined by $8 million.
- International revenue grew to $230.0 million from $209.6 million, increasing from 35% to 37% of total revenue. B2B and consumer scoring revenue continued to face pressure.
Outlook, risks and unusual items
- Management expected FY2012 to remain challenging, but anticipated growth from modest improvement in the credit economy and momentum in the latter part of FY2011. It expected cost of revenue and R&D as percentages of revenue to remain near FY2011 levels, SG&A percentage to be slightly lower, and interest expense to be similar.
- FY2011 restructuring expense was $12.4 million, including $8.2 million for eliminating 177 positions and $4.2 million for excess leased space. The lease-related costs reflect future payments, net of estimated sublease income, over as long as seven years.
- Revenue is substantially tied to banking and insurance activity and transactional volumes. Key risks include slow lending growth, customer concentration, reliance on credit-bureau distribution relationships, competition (including VantageScore), regulation and privacy requirements, data access, long and variable sales cycles, and international exposure.
- The Eighth Circuit affirmed the district court’s rulings against FICO in its VantageScore-related litigation in August 2011. The filing says other ordinary-course disputes were not expected to have a material adverse effect, although potential liabilities could not be determined with certainty.
- FICO reported no goodwill impairment in FY2011. The annual impairment test found each reporting unit’s estimated fair value above carrying value. Management and the auditor reported effective internal control over financial reporting; the auditor issued an unqualified opinion on the financial statements.
Most important facts for investors to verify
- Whether Applications growth and improving operating margins continue, particularly given weaker Scores revenue and the modest overall revenue increase.
- How much reported earnings and EPS improvement reflects operating performance versus share repurchases, lower taxes and restructuring-related effects.
- Whether operating cash flow remains strong and liquidity remains adequate against $512 million of note principal, scheduled maturities and $183.9 million of disclosed future note interest.
- Whether customer and distribution relationships with the three major credit bureaus remain stable, and how competitive scoring products affect those arrangements.
- Actual lending, transaction and account-volume trends underlying recurring, usage-based revenue and management’s FY2012 growth expectations.