Fair Isaac Corporation (FICO) — Form 10-Q Summary
Reporting period: Fiscal first quarter ended December 31, 2021; comparisons are primarily with the quarter ended December 31, 2020. Amounts are in U.S. dollars.
Business context and financial performance
FICO provides analytics software and FICO Scores through its Scores and Software segments. The company reorganized its segment structure in fiscal 2021; prior-period segment figures were recast to match.
| Metric | Q1 FY2022 | Prior comparable period | Change |
|---|---|---|---|
| Revenue | $322.4 million | $312.4 million | +3% |
| Operating income | $115.6 million | $94.7 million | +22% |
| Operating margin | 35.9% | 30.3% | +5.6 percentage points |
| Net income | $85.0 million | $86.5 million | -2% |
| Diluted EPS | $3.09 | $2.90 | +7% |
| Cash from operations | $124.9 million | $77.9 million | +$47.0 million |
Scores revenue grew 17% to $169.5 million, reflecting higher business-to-business prices and volumes and growth in consumer offerings. Software revenue declined 9% to $152.9 million: professional services fell 36%, primarily due to FICO’s strategic emphasis on software and the C&R divestiture; software revenue was essentially flat. The divestiture accounted for $16.3 million of the year-over-year Software revenue decrease.
Cost of revenues fell 23% to $69.2 million, and its share of revenue declined to 21% from 29%, aided by a richer mix of Scores and lower-margin services reductions. The prior-year quarter included a $7.3 million gain on product-line asset sales and a business divestiture; the current quarter did not. Net income was lower despite stronger operating income, mainly in the context of a higher effective tax rate: 18.9% versus 1.7%. Diluted EPS increased in part as diluted weighted-average shares fell to 27.5 million from 29.8 million.
Cash, debt and liquidity
- Cash and cash equivalents were $162.2 million at December 31, 2021, down from $195.4 million at September 30, 2021; $95.5 million was held by foreign subsidiaries.
- Operating cash flow was $124.9 million. Investing activities used $1.3 million, while financing activities used $155.4 million; cash declined $33.2 million during the quarter. Management attributed much of the operating cash flow increase to timing of receipts and payments and non-cash items.
- Total debt was approximately $1.65 billion, compared with $1.27 billion at September 30, 2021. The increase included issuance of $550 million of 4.00% senior notes due 2028 and a $300 million term loan. The company also had $50 million drawn on its revolving facility and $300 million outstanding on the term loan.
- FICO repurchased approximately 1.244 million shares for $493.6 million during the quarter. After quarter-end, it repurchased approximately 375,000 additional shares for $164.1 million and approved a new program authorizing up to $500 million in repurchases.
- FICO reported a stockholders’ deficit of $538.3 million at December 31, 2021. It stated that cash, available revolving credit and expected operating cash flows should cover working and other capital needs and $15 million of term-loan principal payments over the next 12 months. It was in compliance with debt covenants.
Recurring revenue, outlook and risks
- Software annual recurring revenue was $546.6 million, up 10% year over year excluding divestitures; platform ARR grew 67%. Software dollar-based net retention was 109%. Software ACV bookings were $16.6 million, compared with $12.4 million.
- Remaining performance obligations were $270.6 million; FICO expected to recognize approximately 50% over the next 16 months. This measure excludes certain usage-based and other variable revenue.
- No specific quarterly or annual earnings or revenue guidance is provided in the supplied filing text. Management said liquidity was expected to be sufficient for the next 12 months, while noting financing might not be available on favorable terms if additional funds were needed.
- Management expected substantial COVID-related modifications to travel, work locations and sales and marketing interactions to continue through calendar 2022. It said pandemic effects on demand and future financial performance remained uncertain.
- Key disclosed risks include economic and lending conditions; dependence on a small number of customers and distributors; agreements with the three major consumer reporting agencies, which collectively generated 38% of quarterly revenue; potential changes to FICO Score use by Fannie Mae and Freddie Mac; execution of the cloud and FICO Platform strategy; competition; data access, privacy and cybersecurity; and regulatory changes.
- FICO disclosed disputes with customers and claims by former employees, among other ordinary-course matters. It said it had no material aggregate exposure for matters with a reasonable possibility of loss. Unrecognized tax benefits were estimated at $11.8 million at quarter-end.
Important facts for investors to verify
- Whether Scores growth and Software ARR and retention trends persist, especially as services revenue continues to decline.
- The sustainability of the quarter’s margin improvement, including the effects of product mix, cost reductions and the C&R divestiture.
- Debt, interest expense and covenant headroom following the senior-note issuance, term loan and substantial share repurchases.
- The cash-flow trend: management attributed much of the year-over-year increase to timing and non-cash items.
- Exposure to the major consumer reporting agencies and any developments affecting FICO Score use in the U.S. mortgage market.
- Potential impacts of COVID-19, economic and lending conditions, regulation, data privacy and cybersecurity on demand and operations.