Fair Isaac Corporation (FICO) — Q2 FY2023 10-Q
Reporting period: Quarter and six months ended March 31, 2023. FICO provides analytics software and credit scoring through its Scores and Software segments. Unless stated otherwise, financial amounts below are in millions of U.S. dollars.
Financial performance
| Metric | Quarter ended Mar. 31, 2023 | Prior-year quarter | Six months ended Mar. 31, 2023 | Prior-year six months |
|---|---|---|---|---|
| Revenue | $380.3 | $357.2 | $725.1 | $679.6 |
| Operating income | $159.8 | $152.1 | $300.1 | $267.6 |
| Net income | $101.6 | $104.4 | $199.2 | $189.3 |
| Diluted EPS | $4.00 | $3.95 | $7.83 | $7.02 |
| Operating margin | 42.0% | 42.6% | 41.4% | 39.4% |
| Net margin | 26.7% | 29.2% | 27.5% | 27.9% |
- Quarterly revenue rose 6%; Scores increased 8% and Software increased 5%. For the six months, both segments grew 7%.
- Quarterly Scores growth reflected higher B2B unit pricing, partly offset by lower mortgage origination volumes and lower myFICO.com direct sales. Software growth reflected SaaS and other revenue recognized over time; services revenue increased for the quarter but declined for the six-month period.
- Quarterly net income fell 3% despite higher revenue and operating income, as net interest expense increased $6.7 million and the effective tax rate rose to 26.1% from 21.2%. For the six months, net income rose 5%; diluted EPS rose 12%, supported in part by fewer weighted-average shares.
- Software ARR was $613.5 million at March 31, up 17% year over year; quarterly dollar-based net retention was 114%. Software ACV bookings were $23.3 million for the quarter and $44.8 million for the six months. These are management operating metrics, not GAAP revenue.
- Remaining performance obligations were $420.9 million; approximately 50% was expected to be recognized over the next 16 months.
Cash flow, debt and liquidity
- Six-month operating cash flow was $182.2 million, down from $247.5 million. Management attributed the decline mainly to timing of receipts and payments and lower non-cash items; cash flow was also affected by working-capital movements.
- Cash and cash equivalents were $137.8 million at March 31, including $110.5 million held by foreign subsidiaries. Current assets were $521.3 million and current liabilities $373.3 million; reported working capital was approximately $148.0 million.
- Total debt carrying value was approximately $1.925 billion, versus $1.854 billion at September 30, 2022. The balance sheet classified $107.0 million as current maturities. The $600 million revolving facility had $357.0 million drawn; the $300 million term loan had $281.3 million outstanding. Revolver and term-loan rates were 6.343% and 6.529%, respectively.
- Senior notes had $1.3 billion face value, with maturities in 2026 and 2028. FICO reported compliance with its debt covenants. The credit agreement includes a maximum leverage ratio and minimum interest-coverage covenant.
- Six-month share repurchases were $191.3 million. At March 31, $334.8 million remained under the October 2022 $500 million repurchase authorization.
Outlook, risks and unusual items
- Management stated that cash, expected operating cash flows and available revolving-credit borrowings should be sufficient for working and other capital needs for at least the next 12 months and the foreseeable future, including $15.0 million of term-loan principal payments over the next 12 months. The filing provides no numerical revenue or earnings guidance.
- Management expects fiscal 2023 cash tax payments and related deferred-tax-asset positions to increase significantly versus fiscal 2022, primarily in connection with tax capitalization of research and experimental expenditures.
- Variable-rate borrowings expose FICO to higher interest costs; quarterly and six-month interest expense increased as average debt balances and borrowing rates rose. Customer concentration is notable: the three major consumer reporting agencies collectively generated 43% of quarterly revenue, versus 39% a year earlier.
- A $1.9 million gain on the sale of certain Siron compliance business assets was recorded in the six-month period. No goodwill impairment was reported. FICO disclosed customer payment disputes, former-employee claims and other ordinary-course legal matters; it reported no material aggregate exposure for matters with a reasonable possibility of loss.
- The company reported no material changes to the risk factors in its latest Form 10-K. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting identified.
Key investor verification points
- Check whether B2B score pricing continues to offset lower mortgage-related volumes, and whether consumer-direct Scores revenue stabilizes.
- Track Software ARR, platform growth, ACV bookings and retention alongside recognized revenue and cash collections.
- Monitor operating cash flow and working-capital trends, given the year-over-year cash-flow decline.
- Assess debt levels, variable-rate interest exposure, upcoming maturities and covenant headroom.
- Review customer concentration, tax cash-payment expectations and the pace of share repurchases.