FICO

Business Context and Reporting Period

Company: Fair Isaac Corporation (FICO)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2008
Business Overview: FICO provides analytic, software, and data management products enabling businesses to automate decisions. Key segments include Strategy Machine Solutions, Scoring Solutions, Professional Services, and Analytic Software Tools. The company serves financial services, insurance, retail, and government sectors.

Key Financial Metrics

Note: Total Debt includes $267.3M Senior Convertible Notes (current), $38.0M Revolving Credit, and $275.0M Senior Notes.

Material Changes vs. Prior Period

• Revenue Decline: Q2 2008 revenues decreased 7% ($13.3M) compared to Q2 2007. The nine-month period saw a 3% decline.
  • Scoring Solutions: Revenues dropped 20% due to reduced prescreen volumes and pricing pressures in the U.S. financial credit market.
  • Strategy Machine Solutions: Revenues dropped 9% due to declines in collections, fraud, and marketing solutions.
  • Professional Services: Revenues increased 11% driven by implementation services.
• Operating Income: Decreased 25% in Q2 2008 and 24% for the nine months, primarily due to revenue declines and $2.2M in restructuring charges for the quarter.
• Net Income: Increased 11% in Q2 2008 despite lower operating income, largely due to a $7.7M gain from discontinued operations (tax benefit from the sale of the Insurance Bill Review business).
• Debt Restructuring: Issued $275M in Senior Notes in May 2008. Repurchased $123.7M of Senior Convertible Notes during the nine-month period. $267.3M of Convertible Notes are classified as current liabilities due to a mandatory repurchase date of August 15, 2008.

Guidance, Outlook, and Risks

• Reengineering Plan: Announced a plan to rationalize the portfolio and reduce costs. Expected to reduce annual revenues by ~$65M and annual costs by ~$107M once completed.
• Outlook: Management expects competitive pricing pressures and reduced volumes due to weakness in the U.S. financial credit market to continue adversely affecting revenues in fiscal 2008. Cost of revenues and SG&A as a percentage of revenue are expected to remain consistent with or slightly lower than the nine-month 2008 levels.
• Liquidity: The company expects to repay the $267.3M Senior Convertible Notes due August 15, 2008, using available cash and borrowings from its $600M revolving credit facility. Interest expense is expected to increase substantially in future periods.
• Risks:
  • Market Conditions: Dependence on the consumer credit and financial services industries, which are experiencing downturns.
  • Concentration: Significant reliance on three major credit reporting agencies (Equifax, Experian, TransUnion) for distribution and revenue.
  • Litigation: Ongoing antitrust and unfair competition lawsuit against credit reporting agencies regarding the VantageScore product.
  • Goodwill Impairment: Management is monitoring goodwill for impairment due to market weakness, though no impairment was recorded in this period.

Investor Verification Checklist

• Debt Maturity: Verify the company's ability to refinance or repay the $267.3M Senior Convertible Notes due August 15, 2008, and the impact on future interest expenses.
• Revenue Trends: Monitor the trajectory of Scoring Solutions and Strategy Machine Solutions revenues given the cited weakness in the U.S. credit market.
• Restructuring Execution: Track the progress of the reengineering plan to ensure the projected $107M in annual cost savings is realized without disproportionate revenue loss.
• Litigation Status: Review updates on the VantageScore litigation, as a negative outcome could materially affect relationships with key distributors.
• Goodwill Valuation: Assess the risk of future goodwill impairment charges given the decline in operating income for key reporting units.