Fair Isaac Corporation (FICO) — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended March 31, 2022. Comparisons are with the corresponding periods ended March 31, 2021, except balance-sheet comparisons, which are with September 30, 2021. Amounts below are in U.S. dollars.
Business context and financial results
FICO provides analytics and decision-management software and credit scoring products. Its reportable segments are Scores and Software; Software includes on-premises and SaaS products and professional services.
| Metric | Quarter ended Mar. 31, 2022 | Prior-year quarter | Six months ended Mar. 31, 2022 | Prior-year six months |
|---|---|---|---|---|
| Revenue | $357.2 million (+8%) | $331.4 million | $679.6 million (+6%) | $643.8 million |
| Operating income | $152.1 million (+50%); 42.6% margin | $101.2 million; 30.5% margin | $267.6 million (+37%); 39.4% margin | $195.9 million; 30.4% margin |
| Net income | $104.4 million (+52%); 29.2% margin | $68.7 million; 20.7% margin | $189.3 million (+22%); 27.9% margin | $155.2 million; 24.1% margin |
| Diluted EPS | $3.95 (+70%) | $2.33 | $7.02 (+34%) | $5.23 |
| Operating cash flow | Not separately presented for the quarter | $247.5 million | $231.5 million |
Quarterly Scores revenue rose 9% to $183.7 million; Software revenue rose 7% to $173.5 million. For the six-month period, Scores revenue increased 13% to $353.2 million, while Software revenue declined 1% to $326.3 million.
Liquidity, debt and capital allocation
- Cash and cash equivalents were $174.2 million at March 31, 2022, down from $195.4 million at September 30, 2021. Six-month cash flow from operations was $247.5 million; cash used in investing was $3.7 million and cash used in financing was $263.2 million.
- Total debt was approximately $1.79 billion, versus $1.26 billion at September 30, 2021. This includes $1.30 billion face value of senior notes and $215.0 million drawn on a $600 million revolving facility, plus a $296.3 million term-loan balance. The December 2021 issuance of $550 million of 4% notes contributed to the increase. Net debt was approximately $1.62 billion.
- Current assets were $482.2 million and current liabilities $382.8 million at period end. FICO reported compliance with its credit-facility covenants; the facility has a maximum leverage ratio and minimum interest-coverage covenant.
- FICO repurchased $264.0 million of shares in the quarter and $757.6 million in the six months. A January 2022 program authorized up to $500 million; $400.2 million remained available at March 31. Financing cash use also reflected taxes paid on net share settlements of equity awards.
Material changes and operating drivers
- Quarterly Software on-premises and SaaS revenue increased 19% to $149.1 million, partly reflecting a large license deal and SaaS growth; professional services revenue fell 34% to $24.4 million. FICO attributed the services decline partly to its strategic shift toward software and the divestiture of its Collections and Recovery business.
- The C&R divestiture reduced current-quarter revenue by $15.9 million and six-month revenue by $32.2 million, according to management. The lower-margin business’s exit, higher point-in-time license revenue and reduced professional-services mix contributed to improved Software segment margins.
- Quarterly cost of revenue fell 19%; as a share of revenue it declined to 20% from 27%. Consolidated operating-income growth also reflected lower operating expenses. Interest expense rose 73% in the quarter and 50% for the six months, primarily because of higher average debt.
- Software annual recurring revenue was $550.3 million at March 31, up 11% year over year excluding divestitures. Software dollar-based net retention was 110%. Software ACV bookings were $20.6 million for the quarter and $37.2 million for the six months, compared with $13.3 million and $25.4 million, respectively.
Outlook, risks and unusual items
- FICO did not provide specific revenue or earnings guidance in the supplied filing text. Management said cash, available revolver borrowings and expected operating cash flows should fund working and other capital needs and $15 million of term-loan principal payments over the next 12 months.
- Management said it had not experienced material operating disruption from COVID-19, but could not predict effects on demand, customers or future results. Risks highlighted include economic conditions and lending activity, inflation and interest rates, the Russia-Ukraine conflict, customer concentration, competition, regulatory changes, data access and privacy, cybersecurity, and execution of the cloud/platform strategy.
- The three major consumer reporting agencies—TransUnion, Equifax and Experian—collectively accounted for 39% of quarterly revenue; each contributed more than 10%. Mortgage-originations volume declined, partly offsetting Scores growth.
- FICO reported customer payment disputes, former-employee compensation and employment claims, and other ordinary-course legal matters. It stated that reasonably possible losses were not material in aggregate. Unrecognized tax benefits were estimated at $13.2 million.
- Quarterly results included a large license deal with point-in-time revenue recognition. Prior-year six-month results included a $7.3 million gain from product-line asset sales and a business divestiture; the current six-month period did not.
Most important facts for investors to verify
- Whether the software growth and elevated quarterly license contribution persist, given variability from point-in-time recognition and long sales cycles.
- Progress in platform ARR and bookings, and whether the 110% net retention rate is sustained.
- Effects of the C&R divestiture and strategic shift away from services on comparable revenue, costs and margins.
- Debt, interest costs, covenant headroom and liquidity as FICO continues substantial share repurchases.
- Exposure to the three consumer reporting agencies, mortgage-score policy developments, and changes in lending volumes and regulation.