Fair Isaac Corporation (NYSE: FICO) — FY2019 Form 10-K
Reporting period: Fiscal year ended September 30, 2019. The filing is an annual report, not a standalone Q4 filing. Amounts are in U.S. dollars; comparative figures reflect retrospective adoption of the new revenue standard.
Business context and results
FICO sells decision-management applications and software, credit scores, analytics and related services. Its three segments are Applications, Scores and Decision Management Software. Management emphasized cloud delivery and recurring revenue; cloud bookings were 39% of total bookings, versus 35% in FY2018.
| Metric | FY2019 | FY2018 | Change |
|---|---|---|---|
| Revenue | $1,160.1 million | $1,000.1 million | +16% |
| Operating income / margin | $253.5 million / 22% | $175.4 million / 18% | +45% |
| Net income | $192.1 million | $126.5 million | +52% |
| Diluted EPS | $6.34 | $4.06 | +56% |
| Operating cash flow | $260.4 million | $223.1 million | +17% |
| Cash and cash equivalents | $106.4 million | $90.0 million | +$16.4 million |
Derived gross margin was approximately 71% (revenue less cost of revenues, before separately reported intangible amortization). Approximate free cash flow, calculated as operating cash flow less property and equipment purchases, was $236.4 million; this is an analyst calculation, not a company-reported measure.
Segment performance and material changes
- Scores: Revenue rose 25% to $421.2 million; segment operating income increased 33% to $361.4 million. Growth reflected business-to-business scores, including higher unit prices in mortgage and auto activity, and consumer-score royalties.
- Applications: Revenue increased 7% to $605.0 million, led by fraud solutions and customer communication services. Segment operating income rose 12% to $161.2 million.
- Decision Management Software: Revenue grew 34% to $133.9 million, including increased license, SaaS and services revenue. The segment remained loss-making, with a $35.1 million operating loss, slightly wider than FY2018’s $34.4 million loss; management cited continued cloud and product investment.
- Cloud revenue increased 12% to $270.4 million. Revenue from outside the U.S. was 34% of total, compared with 35% in FY2018. Banking-related revenue was 87%, versus 85%.
- Revenue through Experian, TransUnion and Equifax collectively represented 29% of total, up from 25% in FY2018. Experian alone represented 13%.
Liquidity, debt and capital allocation
Operating cash flow was $260.4 million. Investing activities used $42.8 million, including $15.9 million net cash paid for the EZMCOM acquisition; financing activities used $200.0 million. Working capital was negative $35.1 million at year-end, and current liabilities exceeded current assets.
At September 30, 2019, borrowings included $485.0 million of senior notes and $345.0 million drawn on a $400 million revolving credit facility. Cash was $106.4 million. The revolver’s weighted-average rate was 3.423%; the 2018 senior notes bear 5.25% interest and mature in 2026. An $85 million senior-note principal payment was due in July 2020. FICO reported compliance with debt covenants and said cash, operating cash flow and available revolver capacity should meet expected needs.
FICO repurchased approximately 0.9 million shares for $228.9 million during FY2019, with $220.3 million remaining under its current $250 million authorization at year-end. Cash dividends had been discontinued in 2017.
Outlook, risks and unusual items
- The filing provides no quantitative FY2020 revenue or earnings guidance. Management described ongoing cloud conversion and product innovation as growth initiatives; cloud bookings and bookings estimates are not guaranteed future revenue.
- Key risks include reliance on credit-bureau distribution partners and a concentrated banking and insurance customer base; competition, including a credit-score product developed by the three major bureaus; access to relevant data; cloud execution and cybersecurity; privacy and regulatory changes; and economic conditions affecting clients and transaction volumes.
- FICO acquired EZMCOM in August 2019 for $18.6 million in cash. The digital security and authentication company was included from the acquisition date; management said the pro forma impact was not material.
- FY2019 effective tax rate was 11.1%, compared with 19.4% in FY2018, reflecting a lower federal tax rate and prior-year Tax Act items. FY2019 included no restructuring or acquisition-related expense; FY2018 had a $12.9 million non-operating gain associated primarily with an investment divestiture, contributing to the year-over-year decline in other income.
- FICO adopted the revenue standard retrospectively in FY2019, adjusting comparative periods. The auditor issued unqualified opinions on the financial statements and internal control, and identified revenue recognition judgments as a critical audit matter. The company expected lease-standard adoption in FY2020 to add approximately $90 million of right-of-use assets and $99 million of lease liabilities.
- Legal matters included customer disputes over amounts owed and former-employee claims. FICO stated it had no material aggregate exposure for matters with a reasonable possibility of loss. It reported no material off-balance-sheet arrangements.
Important facts for investors to verify
- Whether Scores growth and the higher contribution from credit-bureau partners are sustainable, and how partner pricing or competing bureau scores could affect results.
- Whether cloud revenue and bookings continue to grow while Decision Management Software reduces its operating losses.
- Debt repayment and refinancing capacity, covenant headroom, interest costs and the $85 million July 2020 maturity.
- The durability of FY2019 earnings growth and the unusually low effective tax rate, including tax-credit and stock-compensation tax benefits.
- The effects of revenue-standard restatement and forthcoming lease accounting on comparisons, assets and liabilities.
- Integration and commercial progress from EZMCOM, as well as developments in privacy, cybersecurity, data access and disclosed legal matters.