Fair Isaac Corporation (FICO) — Fiscal 2023 Third Quarter 10-Q
Reporting period: Quarter and nine months ended June 30, 2023; the filing was signed August 2, 2023. FICO provides analytics software and credit scores through its Scores and Software segments. Comparisons below are to the corresponding 2022 periods unless stated otherwise. Dollar amounts are in millions except per-share data.
Financial performance
| Metric | Quarter ended June 30, 2023 | Year-over-year change | Nine months ended June 30, 2023 | Year-over-year change |
|---|---|---|---|---|
| Revenue | $398.7 | +14% | $1,123.8 | +9% |
| Operating income | $177.0 | +26% | $477.1 | +17% |
| Operating margin | 44.4% | 40.3% prior year | 42.5% | 39.7% prior year |
| Net income | $128.8 | +38% | $328.0 | +16% |
| Diluted EPS | $5.08 | +41% | $12.91 | +21% |
| Operating cash flow | Not separately presented for the quarter | — | $304.9 | Down from $364.6 |
Quarterly net margin was 32.3%, versus 26.8% a year earlier. Nine-month net margin was 29.2%, versus 27.5%. Scores revenue rose 13% for the quarter and 9% year to date; Software revenue rose 16% and 10%, respectively. Software growth reflected higher on-premises and SaaS revenue, while professional services revenue declined. Scores B2B growth was driven mainly by higher unit pricing, partly offset by lower mortgage-origination volume; consumer scores revenue fell.
Software segment annual recurring revenue was $645.9 million at June 30, up 20% year over year. Quarterly dollar-based net retention was 117%. These are company-defined operating measures, not GAAP revenue. Software ACV bookings were $21.1 million for the quarter and $65.9 million for the nine months.
Cash, debt and liquidity
- Cash and cash equivalents were $163.0 million at June 30, 2023, compared with $133.2 million at September 30, 2022; $131.7 million was held by foreign subsidiaries. Marketable securities were $32.0 million.
- Total debt was approximately $1.93 billion, versus approximately $1.85 billion at September 30, 2022. The balance included $1.3 billion face value of senior notes and $642.5 million drawn on the revolving credit facility and term loan. The revolver had $365.0 million outstanding of its $600 million capacity.
- Borrowings under the revolver and term loan carried weighted-average rates of 6.723% and 6.830%, respectively. Nine-month net interest expense increased to $71.2 million from $48.1 million.
- Current liabilities were $392.9 million, including $115.0 million of current debt maturities. Stockholders’ deficit was $704.0 million, primarily reflecting accumulated treasury-stock repurchases.
- Management said cash, available credit and expected operating cash flows should fund working and other capital needs for at least 12 months and thereafter, including $15.0 million of term-loan principal payments due over the next 12 months. FICO reported compliance with its credit-facility and senior-note covenants.
Material changes, commentary and risks
- Operating cash flow declined by $59.8 million year over year for the nine-month period, principally due to non-cash items and the timing of operating receipts and payments; higher net income partly offset the decrease. Accounts receivable increased, contributing to the cash-flow movement.
- Software profitability improved: segment operating margin was 38% for the quarter and 32% for the nine months, compared with 27% in both prior-year periods. FICO attributed improvement to higher-margin point-in-time license revenue and lower professional-services sales.
- Quarterly cost of revenues benefited from a one-time reimbursement by a third-party data-center provider for previously incurred implementation costs. Management said this also contributed to lower cost of revenues as a percentage of sales.
- Nine-month results included a $1.9 million gain from the sale of certain Siron compliance-business assets. The quarterly effective tax rate was favorably affected by release of a valuation allowance for California research and development tax credits. FICO also expected fiscal 2023 cash tax payments and related deferred-tax-asset positions to increase significantly versus fiscal 2022 because of tax-law capitalization requirements for research and experimental expenditures.
- Repurchases totaled $289.9 million for the nine months, down from $1.0 billion in the prior-year period. The October 2022 repurchase program had $236.9 million remaining at June 30.
- Three major consumer reporting agencies collectively generated 42% of quarterly revenue and 40% of nine-month revenue. The filing also notes disputes with customers and claims from former employees, but says it did not have material aggregate exposure for proceedings with a reasonable possibility of loss. No material changes to previously disclosed risk factors were reported.
- FICO cited exposure to variable interest rates and foreign exchange movements. Management reported effective disclosure controls and no material change in internal control over financial reporting during the period.
Outlook: The filing provides a liquidity outlook but no specific revenue, earnings or EPS guidance.
Important facts for investors to verify
- Whether Software ARR growth, bookings and retention continue to convert into recognized revenue and cash flow.
- How durable the reported margin improvement is after the one-time data-center reimbursement and stronger point-in-time license revenue.
- Trends in mortgage-related score volumes and consumer scores sales, alongside the pricing contribution to B2B growth.
- Revenue exposure to the three consumer reporting agencies and any changes in those customer relationships.
- Debt levels, floating-rate borrowing costs, covenant headroom and the effect of continued repurchases on liquidity.
- Cash conversion, receivables collection, and the expected cash-tax increase described by management.