Fair Isaac Corporation (FICO) — FY2017 Form 10-K
Reporting period: Fiscal year ended September 30, 2017. The filing also reports fourth-quarter results for the three months ended September 30, 2017. FICO provides analytics, decision-management software and credit scores to businesses and consumers.
Financial performance
| Metric | FY2017 | FY2016 | Change |
|---|---|---|---|
| Revenue | $932.2 million | $881.4 million | +6% |
| Operating income / margin | $177.2 million / 19% | $169.6 million / 19% | Income +4% |
| Net income / net margin | $128.3 million / 14% | $109.4 million / 12% | Income +17% |
| Diluted EPS | $3.98 | $3.39 | +17% |
| Operating cash flow | $225.6 million | $210.3 million | +$15.3 million |
| Cash and cash equivalents | $105.6 million | $75.9 million | +$29.7 million |
Q4 FY2017: Revenue was $253.2 million versus $235.8 million in Q4 FY2016; net income was $40.0 million versus $32.1 million; diluted EPS was $1.25 versus $1.00. Quarterly cash flow is not clearly provided in the supplied filing text.
Annual revenue by segment: Applications $553.2 million (+4%); Scores $266.4 million (+10%); Decision Management Software $112.6 million (+5%). Scores operating income rose 14% to $211.9 million; Applications operating income declined 5% to $159.5 million; Decision Management Software reported a $10.8 million operating loss, wider than the prior-year $3.7 million loss.
Liquidity, debt and capital allocation
- At year-end, current assets were $310.9 million and current liabilities $326.7 million; working capital was negative $15.7 million.
- Debt was approximately $605 million: $361 million outstanding on the $500 million revolving facility and $244 million of senior notes. The revolver’s weighted-average rate was 2.365%; FICO reported covenant compliance.
- FICO generated $225.6 million in operating cash flow and used $20.6 million in investing activities. Financing activities used $180.6 million, including $193.3 million of share repurchases, partly offset by net revolver borrowings.
- The $131 million 2008 senior-note principal payment was due in May 2018. Management said cash, available credit and anticipated operating cash flow were expected to cover requirements, including this payment.
- FICO discontinued its quarterly dividend in May 2017 in favor of repurchases. A new $250 million repurchase authorization was approved in October 2017.
Material changes, outlook and risks
- Net income growth was aided substantially by adoption of ASU 2016-09: $24.7 million of excess share-based compensation tax benefits reduced FY2017 income-tax expense. The effective tax rate fell to 15.2% from 24.3%; reported earnings growth should be assessed with this benefit in mind.
- Cloud bookings were 24% of total bookings, down from 26% in FY2016. FICO added AWS as its primary cloud infrastructure provider and plans further application migrations over three years. Management gave no numeric FY2018 revenue or EPS guidance.
- For FY2018, management expected cost of revenue as a share of revenue and SG&A as a share of revenue to remain consistent with FY2017; R&D as a share of revenue was expected to be consistent or slightly higher; amortization expense was expected to be significantly lower; and net interest expense to be consistent.
- Bookings were $429.0 million for FY2017 versus $378.0 million, but management cautioned bookings are estimates—not backlog—and actual revenue and timing can differ materially.
- Key exposures include dependence on credit-bureau distribution partners (Experian, TransUnion and Equifax together generated 20% of FY2017 revenue), concentration in banking and insurance, data access and privacy regulation, cybersecurity and service interruption, competition, cloud execution, long sales cycles, and economic conditions. FY2017 banking and insurance customers accounted for 76% of revenue.
- FY2017 included $4.5 million of restructuring charges, comprising facilities and severance costs. FICO reported no goodwill impairment and no material aggregate exposure from legal proceedings considered reasonably possible.
Important facts for investors to verify
- How much FY2017 earnings growth is repeatable after excluding the $24.7 million stock-compensation tax benefit?
- Whether Scores growth and margins can offset slower Applications growth and continued Decision Management Software losses.
- Progress of cloud migration, cloud bookings, and related infrastructure costs and revenue-recognition effects.
- Funding and repayment plans for the May 2018 $131 million note maturity, alongside share repurchases and total leverage.
- Terms and performance of credit-bureau distribution relationships, and any changes in partner concentration or competitive offerings.