FICO

Business Context and Reporting Period

Company: Fair Isaac Corporation (FICO)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: December 31, 2008
Business Overview: FICO provides analytic, software, and data management products enabling businesses to automate decisions, primarily serving the consumer credit, financial services, and insurance industries. The company operates through four segments: Strategy Machine Solutions, Scoring Solutions, Professional Services, and Analytic Software Tools.

Key Financial Metrics

Note: Total Debt consists of $295 million in revolving credit facility borrowings and $275 million in Senior Notes.

Material Changes vs. Prior Period

• Revenue Decline: Total revenues decreased 14% ($26.6 million) year-over-year. This was driven by declines across three of four segments:
  • Strategy Machine Solutions: Down 10% due to reduced volumes in fraud and collections solutions.
  • Scoring Solutions: Down 20% due to reduced new account acquisition activities by financial institutions.
  • Professional Services: Down 23% as customers slowed contracted services and license sales declined.
• Profitability Impact: Operating income fell 41% ($14.1 million) and Net Income fell 40% ($8.1 million).
  • Restructuring Charges: The company incurred $8.1 million in restructuring charges in Q4 2008 (vs. a $0.4 million reversal in Q4 2007). This included $5.9 million for severance related to 255 position reductions and $2.6 million for facility closures.
  • Interest Expense: Increased 62% ($2.7 million) due to the issuance of $275 million in Senior Notes at a 6.8% weighted average rate, replacing lower-cost convertible notes.
• Bookings: Bookings dropped significantly to $52.5 million in Q4 2008 compared to $92.7 million in Q4 2007, reflecting the difficult economic environment.

Outlook, Risks, and Management Commentary

• Reengineering Plan: Management is executing a reengineering plan to improve profitability through cost reductions. In January 2009, the company announced additional actions (committed prior to Dec 31, 2008) targeting $30 million in annual cost savings via headcount reductions and facility consolidations.
• Economic Environment: The filing highlights that the global financial crisis has substantially impacted customers, particularly financial institutions, leading to reduced credit extension and software purchases. Management expects these conditions to continue affecting the business in fiscal 2009.
• Goodwill Impairment Risk: Management performed an interim goodwill impairment test as of December 1, 2008, concluding no impairment was necessary. However, they noted that if difficult market conditions persist, further declines in fair value could trigger impairment charges in the future.
• Liquidity: The company maintains $287.8 million in cash and marketable securities and has $305 million remaining capacity on its $600 million credit facility. Management believes these resources are sufficient for the next 12 months.
• Legal Proceedings: FICO is involved in litigation against Equifax, Experian, and TransUnion regarding the VantageScore product. A settlement was reached with Equifax, but the case against the others is expected to go to trial in mid-2009.

Investor Verification Checklist

• Revenue Trajectory: Verify if the 14% revenue decline and 43% drop in bookings are stabilizing or accelerating in subsequent quarters.
• Restructuring Execution: Confirm the realization of the projected $30 million in annual cost savings from the reengineering plan.
• Goodwill Valuation: Monitor the fair value of reporting units given the volatility in the financial sector; assess the risk of future goodwill impairment charges.
• Customer Concentration: Review the impact of the financial crisis on the top customers, particularly the three major credit reporting agencies which account for ~19% of total revenues.
• Debt Service: Assess the impact of the higher interest rate environment (6.8% on Senior Notes) on future operating margins.