Business Context and Reporting Period
Company: Fair Isaac Corporation (FICO)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2009
Business Overview: FICO provides analytic, software, and data management products and services enabling businesses to automate and improve decisions. Key segments include Strategy Machine Solutions, Scoring Solutions, Professional Services, and Analytic Software Tools. The company serves banks, credit reporting agencies, insurers, retailers, and government agencies.
Key Financial Metrics
| Metric | Quarter Ended June 30, 2009 | Nine Months Ended June 30, 2009 |
|---|---|---|
| Revenues | $156.0 million | $478.8 million |
| Operating Income | $33.2 million | $83.9 million |
| Net Income | $18.1 million | $48.0 million |
| Diluted EPS (Total) | $0.37 | $0.98 |
| Operating Margin | 21.3% | 17.5% |
| Cash and Cash Equivalents | $240.3 million | (Balance Sheet Item) |
| Total Debt (Notes + Revolver) | $570.0 million | (Balance Sheet Item) |
| Operating Cash Flow (9 Months) | N/A | $124.3 million |
Material Changes vs. Prior Period
- Revenue Decline: Revenues decreased 15% ($27.3 million) for the quarter and 16% ($87.8 million) for the nine-month period compared to the prior year. This was driven by difficult global economic conditions, reduced customer spending on technology, and unfavorable currency translation (weakening British Pound).
- Segment Performance:
- Strategy Machine Solutions: Revenue down 14% (quarter) and 13% (9 months) due to declines in collections, consumer, and fraud solutions.
- Scoring Solutions: Revenue down 8% (quarter) and 17% (9 months) due to reduced volumes from credit reporting agencies and pricing pressures.
- Professional Services: Revenue down 30% (quarter) and 25% (9 months) as customers slowed contracted services.
- Cost Reductions: Operating expenses decreased 20% for the quarter and 17% for the nine-month period, primarily due to a reengineering plan involving headcount reductions (255 positions eliminated) and facility consolidations.
- Unusual Items: The company recognized a $3.0 million pre-tax loss on the sale of the LiquidCredit (LCT) and RoamEx product line assets in June 2009. Goodwill associated with these sales was not tax-deductible.
- Interest Expense: Increased 17% for the quarter due to the issuance of $275 million in Senior Notes in May 2008 (weighted average rate 6.8%) replacing lower-cost convertible notes.
Guidance, Outlook, and Risks
- Outlook: Management expects the difficult business environment to continue affecting results during the remainder of fiscal 2009. They anticipate cost of revenues as a percentage of revenues will be slightly higher in the next few quarters. R&D and SG&A expenses as a percentage of revenues are expected to remain consistent with the current quarter.
- Reengineering Plan: The company is executing a plan to improve profitability through cost reduction and strategic resource allocation. Additional actions announced in January 2009 are expected to yield approximately $30 million in annual cost savings.
- Liquidity: As of June 30, 2009, the company held $371.6 million in cash, cash equivalents, and marketable securities. It has a $600 million revolving credit facility with $295 million outstanding. Management believes these resources are sufficient to fund operations for the next 12 months.
- Risks:
- Economic Conditions: Continued stress in global financial markets and reduced credit extension by financial institutions.
- Customer Concentration: Significant reliance on the three major credit reporting agencies (Equifax, Experian, TransUnion), which collectively accounted for approximately 20% of total revenues in the quarter.
- Goodwill Impairment: If market conditions deteriorate further, the company may be required to record impairment charges related to goodwill.
- Litigation: Ongoing antitrust and unfair competition litigation against credit reporting agencies regarding the VantageScore product.
Investor Verification Checklist
- Verify the impact of the reengineering plan on future operating margins and headcount stability.
- Monitor the status of the litigation against Equifax, Experian, and TransUnion regarding VantageScore.
- Assess the sustainability of revenue declines in the Scoring Solutions and Professional Services segments given the macroeconomic environment.
- Review the company's ability to maintain liquidity given the $570 million in debt obligations and potential for further goodwill impairment.
- Confirm the timeline and potential revenue impact of the divestiture of LCT and RoamEx product lines.