Fair Isaac Corporation (FICO) — Form 10-Q Summary
Reporting period: Fiscal first quarter ended December 31, 2012; comparisons are with the quarter ended December 31, 2011 unless stated otherwise. FICO provides analytics, software, scoring and data-management solutions. Figures are in millions of dollars except per-share data.
Financial performance and liquidity
| Metric | Q1 FY2013 | Q1 FY2012 | Change |
|---|---|---|---|
| Revenue | $190.0 | $170.3 | +12% |
| Operating income | $43.0 | $52.1 | -17% |
| Operating margin | 22.6% | 30.6% | Down 8.0 percentage points |
| Net income | $23.4 | $30.0 | -22% |
| Diluted EPS | $0.65 | $0.81 | -20% |
| Operating cash flow | $28.7 | $41.1 | -30% |
- Revenue by segment: Applications $124.7 million (+13%); Scores $43.4 million (+2%); Tools $21.9 million (+24%). Applications represented 66% of revenue.
- Transactional and maintenance revenue was $129.9 million; professional services revenue $32.3 million; license revenue $27.8 million.
- Cash and cash equivalents were $90.8 million at December 31, up from $71.6 million at September 30, 2012. Operating cash flow was offset by $27.6 million of net cash paid for the CR Software acquisition and $9.0 million of property and equipment purchases. Cash increased $19.2 million during the quarter.
- Debt: $455 million of senior notes classified as long-term and $49 million of current maturities; carrying value of notes was $504 million. The $200 million revolving facility had no borrowings outstanding. FICO reported compliance with debt covenants.
- FICO paid a quarterly dividend of $0.02 per share. The $150 million repurchase authorization had no purchases under the program; shares withheld for employee tax obligations are separate.
Changes and notable items
- Revenue growth was led by Applications, including mobility solutions following the September 2012 Adeptra acquisition, and by Tools license sales. Applications growth was partly offset by lower fraud-solutions revenue compared with a quarter that included large multi-year license deals.
- Operating costs grew faster than revenue. Cost of revenue rose 22% and SG&A rose 22%; each increased as a share of revenue. Management cited acquisition-related headcount and costs, third-party software and data costs, and higher sales commissions. Applications segment operating margin fell from 36% to 26%, partly due to lower-margin acquired products and fewer higher-margin software sales.
- Reported operating income included $3.3 million of restructuring and acquisition-related expense, versus none in the prior-year quarter. The filing describes $2.5 million of net restructuring charges, including facilities costs and severance associated with eliminating 52 positions, and $0.8 million of acquisition-related costs.
- FICO acquired CR Software on November 21, 2012 for preliminary cash consideration of $28.8 million, net cash outflow of $27.6 million. Preliminary allocation included $13.2 million of goodwill and $16.5 million of identifiable intangible assets. Purchase consideration remained subject to a pending working-capital adjustment; goodwill was not tax deductible.
- Bookings were $82.0 million, versus $59.2 million, with a weighted-average term of 28 months versus 22 months. Bookings yield was 33% versus 21%. Management cautions that bookings are estimates, depend partly on future volumes and activity, and should not be treated as backlog.
Outlook, risks and contingencies
- Management said cash, operating cash flows and available revolver capacity should be sufficient for working-capital needs and the $49 million senior-note principal payment due in May 2013. It expects lower interest expense after that payment.
- For the next several quarters, management expected cost of revenue, R&D and SG&A as percentages of revenue to remain consistent with or slightly above Q1 levels. Amortization expense was expected to be slightly lower. No specific revenue or EPS forecast is provided in the supplied filing text.
- Business exposure is concentrated: consumer banking generated 72% of quarterly revenue; 40% came from outside the U.S. Transactional or unit-based arrangements accounted for approximately 68% of revenue. The three major credit bureaus collectively accounted for approximately 15% of revenue.
- Key stated risks include dependence on financial-services customers and distribution partners, including the major credit bureaus; economic and regulatory changes; competition, including a credit-scoring offering developed by the bureaus; access to data; technology and product execution; cybersecurity and service interruptions; and acquisition integration and impairment risks.
- FICO reported customer disputes, former-employee claims and other ordinary-course matters. It stated that aggregate exposure for matters with a reasonable possibility of loss was not material. Unrecognized tax benefits were estimated at $7.6 million, with $0.7 million of related accrued interest.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether revenue growth, bookings and acquired-business contributions translate into sustained revenue and cash generation, particularly given the longer bookings term and reliance on estimated transaction volumes.
- Whether operating margins recover as acquisition integration proceeds, and how lower-margin products, restructuring and acquisition costs affect results.
- Cash-flow conversion and liquidity after the May 2013 $49 million debt payment; confirm subsequent debt repayments, revolver availability and covenant compliance.
- Final CR Software purchase-price allocation and working-capital adjustment, plus acquisition performance, integration costs and any impairment indicators.
- Developments in customer concentration, credit-bureau relationships, regulation, data access and competition that could affect recurring and transactional revenue.