Fair Isaac Corporation (FICO) — Form 10-Q Summary
Business context and reporting period. FICO provides analytics, scoring, software and related services that support business decision-making. This is the first quarter of fiscal 2011, ended December 31, 2010; comparisons are with the quarter ended December 31, 2009, unless otherwise noted. Banking and insurance represented 77% of quarterly revenue. Approximately 75% of revenue came from maintenance or transactional/unit-based arrangements.
Financial performance
| Metric | Q1 FY2011 | Q1 FY2010 | Change |
|---|---|---|---|
| Revenue | $155.9 million | $151.5 million | +3% |
| Operating income | $29.6 million | $31.6 million | -6% |
| Operating margin | 19.0% | 20.9% | -1.9 percentage points |
| Net income | $16.0 million | $17.7 million | -9% |
| Diluted EPS | $0.40 | $0.37 | +8% |
| Operating cash flow | $32.9 million | $31.3 million | +5% |
Revenue growth reflected Applications (+5%) and Tools (+2%), partly offset by Scores (-2%). License revenue increased 31% to $13.3 million and professional services rose 6% to $27.9 million; transactional and maintenance revenue was nearly flat at $114.8 million. Applications revenue benefited from fraud, originations and marketing solutions, while Scores revenue declined mainly on lower credit-reporting-agency transaction volumes.
Operating expenses rose 5% to $126.3 million, faster than revenue. Cost of revenue increased 8% and SG&A increased 8%; R&D declined 5%. Operating income also faced higher interest expense, up $2.8 million to $8.2 million, largely due to the $245 million of notes issued in July 2010. The 25.3% effective tax rate, down from 33.0%, benefited from recognition of the federal R&D tax credit. Net income declined despite diluted EPS increasing, with weighted-average diluted shares falling to 40.4 million from 47.9 million.
Financial position and liquidity
- At December 31, cash and cash equivalents were $196.4 million; cash, cash equivalents and marketable-security investments totaled $248.1 million.
- Current assets were $365.2 million and current liabilities $118.1 million. Long-term debt was $512.0 million, with $8.0 million current maturities; senior notes totaled $520.0 million. No revolving-credit borrowings were outstanding.
- Operating cash flow was $32.9 million; investing activities provided $20.1 million, primarily from marketable-security maturities; financing activities used $2.5 million. Cash increased $50.2 million during the quarter.
- FICO paid $0.8 million in dividends and repurchased $2.2 million of stock. $174.4 million remained under its $250 million repurchase authorization.
- The $600 million unsecured revolving facility was reduced to $200 million effective January 20, 2011, and expires October 20, 2011. Management stated that available funds, the facility and expected operating cash flows should cover working capital, capital needs and scheduled debt repayments for the next 12 months; no significant debt maturities were expected before May 2013.
Material changes, outlook and risks
- Bookings increased to $84.0 million from $59.9 million. Bookings yield was 20% versus 23%, and weighted-average term was 42 months versus 40 months. Management cautions that bookings rely on estimates and are not backlog or a substitute for reported revenue.
- Management described conditions as stabilizing, with signs of gradual improvement, but cited persistent U.S. unemployment, a difficult housing market and a modest expected global recovery. It plans to manage expenses while investing in Decision Management solutions and core operations.
- Management expected cost of revenue as a share of revenue to remain consistent or be slightly higher than Q1 levels; R&D and SG&A percentages were expected to remain consistent. Amortization was expected to be slightly lower and interest expense consistent with Q1. No specific revenue or earnings guidance was provided in the supplied filing text.
- Fiscal 2011 Q1 included $0.9 million of restructuring charges, mainly for vacating excess leased space. Remaining restructuring accruals were expected to be paid by fiscal 2018.
- Goodwill was $664.2 million. Management highlighted sensitivity in the Applications reporting unit: its July 2010 fair value was 110% of carrying value, and a 13.5% cash-flow decline or a 1.3-point increase in discount rate would have caused it to fail the first impairment-test step. Deteriorating economic conditions could trigger an impairment charge.
- Key risks include dependence on financial-services customers and the three major credit bureaus, economic and transaction-volume weakness, competitive pressure (including VantageScore), data access and privacy requirements, execution of the Decision Management strategy, long sales cycles, and cybersecurity and technology risks.
- FICO reported ongoing customer, employment and ordinary-course claims, but said it did not expect them to materially affect results, liquidity or financial condition; potential loss amounts were not determinable with certainty. Appeals remained pending in its VantageScore-related litigation, with rulings expected in mid-2011. The Braun-related securities litigation settlement required no company contribution but remained subject to appeal.
- Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether revenue growth and the strong bookings comparison translate into recognized revenue, particularly given bookings assumptions and the lower bookings yield.
- Whether margin pressure persists as operating costs grew faster than revenue and segment operating income declined across Applications, Scores and Tools.
- Debt terms, covenant compliance and the availability and renewal or replacement of the $200 million revolving facility, which expires in October 2011.
- Applications goodwill valuation assumptions and any subsequent impairment indicators as economic and customer conditions evolve.
- Developments in credit-bureau relationships, litigation appeals, customer concentration and applicable regulatory or data-access changes.