Fair Isaac Corporation (FICO) — Q3 FY2016 Form 10-Q
Reporting period: Quarter and nine months ended June 30, 2016; filed July 28, 2016. FICO provides analytics, software, data-management solutions and credit scores. The quarter is the third quarter of its fiscal year.
Financial performance
| Metric | Q3 FY2016 | Q3 FY2015 | Nine months FY2016 | Nine months FY2015 |
|---|---|---|---|---|
| Revenue | $238.8 million | $209.4 million | $645.5 million | $606.0 million |
| Operating income | $55.3 million | $37.1 million | $124.7 million | $96.3 million |
| Operating margin | 23% | 18% | 19% | 16% |
| Net income | $35.0 million | $19.9 million | $77.3 million | $53.2 million |
| Diluted EPS | $1.08 | $0.62 | $2.39 | $1.63 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $161.6 million | $86.4 million |
Q3 revenue increased 14%, operating income 49%, and net income 76% year over year. Nine-month revenue rose 7%, operating income 29%, and net income 45%. Q3 revenue growth included higher Applications revenue (+11%), Scores (+10%) and Tools (+36%). A large multi-year license transaction contributed to growth in Applications and Tools.
For the nine months, operating cash flow increased by $75.2 million, which FICO attributed mainly to lower net income taxes paid, higher net income and timing of ordinary-course receipts and payments. Investing cash use was $18.2 million, including $12.5 million for property and equipment and $5.7 million for the QuadMetrics acquisition. Financing cash use was $109.1 million, including $96.1 million of share repurchases. Operating cash flow less property and equipment purchases was approximately $149.1 million, a simple cash-flow proxy, versus $68.1 million in the prior-year period.
Financial position, debt and liquidity
- At June 30, cash and cash equivalents were $118.2 million, including $91.8 million held by foreign subsidiaries; total current assets were $295.8 million and current liabilities $250.2 million.
- Total debt was approximately $601.0 million: $225.0 million drawn under the $400 million revolving facility and $376.0 million of senior notes. Cash less total debt was approximately $482.8 million. FICO reported compliance with debt covenants.
- The revolver expires in December 2019. FICO expected available cash, operating cash flows and revolver capacity to fund requirements, including a $60 million senior-note principal payment scheduled for July 2016. Management did not anticipate repatriating undistributed foreign earnings in the foreseeable future.
- Compared with September 30, 2015, cash increased from $86.1 million; total assets were nearly unchanged at $1.227 billion versus $1.230 billion. Goodwill was $802.2 million and stockholders’ equity $428.0 million.
Material changes and management commentary
- Transactional and maintenance revenue increased 6% in the quarter and 9% year to date. Professional services rose 17% and 6%, respectively; license revenue rose 52% in the quarter but fell 5% year to date.
- Scores’ nine-month revenue increased 19%, including growth in consumer services and business-to-business scores. FICO cited the Experian.com score offering and resolution of previously underreported royalties as contributors.
- Cost of revenues fell to 28% of quarterly revenue from 31%, and to 29% year to date from 34%, with management citing improved professional-services efficiency, higher-margin software sales and lower outside-services costs.
- SG&A rose 17% in the quarter and 10% year to date, reflecting personnel, incentive, marketing and distribution investments; share-based compensation also increased year to date. Management said it was redirecting incremental investment toward expanding and refining distribution capabilities.
- Bookings were $78.8 million in the quarter versus $60.2 million a year earlier; nine-month bookings were $297.7 million versus $209.4 million. Bookings are estimates of current and future revenue, and actual revenue and timing may differ materially. Nine-month bookings yield was 33%, down from 45%.
Outlook, unusual items and risks
- Management expected cost of revenues as a share of revenue to remain consistent with or be slightly higher than Q3 levels; R&D and SG&A percentages were expected to remain consistent with Q3. Net interest expense was expected to be lower after the scheduled $60 million July note payment. The filing provides no clear full-year revenue or EPS guidance.
- In May, FICO acquired all of QuadMetrics, an enterprise security analytics provider, for $5.7 million cash. It recorded $2.0 million in amortizable intangible assets and $3.9 million of goodwill, allocated to Applications; the goodwill was not tax-deductible.
- In July, the board approved a new open-ended stock repurchase authorization of up to $250 million, replacing the prior program. FICO repurchased approximately 1.0 million shares for $100.5 million in the nine months ended June 30. It paid a $0.02-per-share quarterly dividend.
- Risks include reliance on banking and consumer-credit markets, concentrated products and distribution relationships, and the three major credit reporting agencies. Those agencies collectively accounted for approximately 17% of quarterly revenue and 19% of nine-month revenue. The filing also identifies competition, changing regulation, data access and privacy, cybersecurity, execution of new products and acquisitions, economic conditions, and foreign-exchange exposure.
- FICO reported customer disputes over amounts owed, former-employee claims and other ordinary-course legal matters; it stated that reasonably possible losses were not material in aggregate. It reported no material off-balance-sheet arrangements.
Key facts for investors to verify
- Whether the large multi-year license transactions underpinning Q3 Applications and Tools growth recur, and how bookings convert to recognized revenue.
- The timing and payment of the $60 million senior-note principal amount due in July 2016, and subsequent debt and liquidity levels.
- Whether Scores growth and relationships with the credit reporting agencies remain durable, given customer and channel concentration and competitive offerings.
- Execution and returns from distribution investments and the QuadMetrics acquisition, alongside the new $250 million repurchase authorization.
- Potential sensitivity of results to variable transaction volumes, foreign exchange, tax estimates, regulatory changes, data availability and cybersecurity events.