Fair Isaac Corporation (FICO) — Form 10-Q Summary
Reporting period: Fiscal first quarter ended December 31, 2019; comparisons are with the quarter ended December 31, 2018 unless stated otherwise. FICO provides analytics, software, data-management solutions and credit scoring products.
Financial performance
| Metric | Q1 FY2020 | Q1 FY2019 | Change |
|---|---|---|---|
| Revenue | $298.5 million | $262.3 million | Up 14% |
| Operating income | $51.9 million | $49.0 million | Up 6% |
| Operating margin | 17.4% | 18.7% | Down 1.3 percentage points |
| Net income | $54.9 million | $40.0 million | Up 37% |
| Diluted EPS | $1.82 | $1.32 | Up 38% |
| Cash from operations | $60.4 million | $48.9 million | Up $11.5 million |
- Revenue growth was led by Scores, up 34% to $115.1 million. Applications grew 3% to $152.2 million; Decision Management Software grew 8% to $31.2 million.
- Cloud revenue increased 16% to $73.7 million. Scores revenue benefited from higher auto-score unit pricing, increased mortgage volumes and a large annual license deal.
- Cost of revenue rose 19%, faster than revenue, and increased to 30% of revenue from 29%. Operating income growth also reflected higher headcount, cloud infrastructure investment and $3.1 million of restructuring costs.
- Net income included a $13.0 million income tax benefit, versus a $2.9 million benefit a year earlier. Management attributed the unusually low effective tax rate of negative 31.1% primarily to excess tax benefits on vested stock awards; net income growth therefore exceeded operating income growth.
- Bookings were $112.1 million versus $106.6 million; bookings yield was 14% versus 15%. Management cautions that bookings include estimates and actual revenue or timing may differ.
Cash, liquidity and debt
- Cash and cash equivalents were $111.2 million at December 31, 2019, including $88.7 million held offshore. Operating cash flow was $60.4 million; investing cash outflow was $9.0 million and financing cash outflow was $48.2 million.
- FICO repurchased 168,383 shares for $60.0 million during the quarter; $160.3 million remained under the $250 million authorization at quarter-end.
- Balance-sheet debt was approximately $918.3 million, comprising $180.0 million of current maturities and $738.3 million of long-term debt. Senior-note face value was $835.0 million; the company also had $95.0 million drawn on its $400 million revolving facility.
- FICO issued $350 million of 4.00% senior notes due 2028 in December and used the proceeds to repay a large portion of revolving borrowings. The company said it was compliant with debt covenants.
- An $85.0 million principal payment on 2010 senior notes was due in July 2020. Management expected cash, operating cash flows and available revolver borrowings to cover capital needs and this payment.
- FICO adopted the new lease standard in the quarter, recording operating lease assets and liabilities. Prior periods were not restated, so balance-sheet comparisons are not directly comparable.
Management commentary, outlook and risks
- Management emphasized continued Scores growth and a cloud-first strategy for Applications and Decision Management Software. The filing provides no specific revenue or earnings guidance.
- Customer and revenue concentration are notable: 84% of quarterly revenue came from banking, including consumer credit; international revenue was 33%. Experian represented 13% of revenue, and Equifax and TransUnion together represented 16%.
- Key disclosed risks include dependence on major credit bureaus and distributors, economic conditions in banking and consumer credit, competition (including a competing score developed by the major credit bureaus), data access and privacy regulation, cybersecurity and service interruptions, and execution of cloud and decision-management strategies.
- The company recorded $3.1 million of employee separation costs for eliminating 69 positions; related cash payments were expected by the end of fiscal Q2. It reported customer payment disputes, former-employee claims and other ordinary-course legal matters, but no material aggregate exposure for matters assessed as reasonably possible.
- Disclosure controls were reported effective, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether Scores growth, including the large annual license deal and bureau-related activity, is recurring and sustainable.
- How higher cloud infrastructure costs and investment affect Applications and Decision Management Software margins.
- The extent to which future earnings depend on stock-award tax benefits, which increased net income in this quarter.
- Debt repayment capacity, refinancing needs, covenant headroom and cash availability, including the offshore cash balance and July 2020 maturity.
- Revenue exposure to the major credit reporting agencies, banking customers, and changing privacy, scoring and data-access rules.