Business context and reporting period
Fair Isaac Corporation (FICO) filed this unaudited Form 10-Q for the quarter ended December 31, 2017, the first quarter of fiscal 2018. FICO provides analytics, software, decision-management solutions and credit-scoring products. It reports Applications, Scores and Decision Management Software segments.
Financial performance and liquidity
| Metric | Quarter ended Dec. 31, 2017 | Prior-year quarter |
|---|---|---|
| Revenue | $235.3 million | $219.6 million |
| Operating income | $39.9 million; 17% of revenue | $34.9 million; 16% of revenue |
| Income before taxes | $34.0 million | $28.7 million |
| Income tax provision (benefit) | $6.7 million | $(9.2) million |
| Net income | $27.3 million | $37.9 million |
| Diluted EPS | $0.86 | $1.16 |
| Cash from operations | $28.8 million | $33.0 million |
Revenue increased 7% and operating income increased 14%, while net income fell 28%, primarily because of income-tax expense associated with the Tax Cuts and Jobs Act. The filing reports a 19.6% effective tax rate for the quarter versus a tax benefit and a negative 32.3% rate in the prior-year quarter. Cost of revenues was 32% of revenue in both periods.
Revenue by segment: Applications $141.4 million (+5%); Scores $69.9 million (+18%); Decision Management Software $24.0 million (−6%). Segment operating income was $38.8 million for Applications and $54.0 million for Scores; Decision Management Software recorded a $7.9 million operating loss, compared with a $3.6 million loss a year earlier.
Cash and cash equivalents were $94.2 million at quarter-end, including $87.6 million held offshore; marketable securities were $15.8 million. Current assets were $299.1 million and current liabilities $353.3 million. Total debt was approximately $663.8 million: $420.0 million outstanding on the revolving facility and $243.8 million in senior notes. FICO had a $600 million revolving credit capacity, was in compliance with covenants, and said available cash, credit capacity and operating cash flows should fund requirements, including a $131.0 million senior-note payment due May 2018. The revolving facility expires December 30, 2019.
Investing cash outflow was $6.0 million; financing cash outflow was $34.7 million. FICO repurchased approximately 335,000 shares for $49.6 million and had $237.0 million remaining under its repurchase authorization.
Material changes and management commentary
- Scores growth reflected increases in both business-to-consumer and business-to-business scoring. Applications growth came mainly from customer communications, collections and recovery, and originations; Decision Management Software weakness reflected lower Blaze Advisor license revenue.
- Cloud revenue was $56.6 million, or 24% of revenue, versus $50.1 million, or 23%, a year earlier. Management said it continued to pursue a cloud-first strategy and invest in cloud and SaaS development.
- Bookings declined to $82.2 million from $96.4 million; bookings yield fell to 18% from 21%, and contracts exceeding $1 million numbered 9 versus 13. Management cautioned that bookings estimates can differ materially from actual revenue and timing.
- Operating cash flow declined $4.2 million, mainly due to timing of ordinary-course receipts and payments. Management expected cost of revenues, R&D and SG&A as percentages of revenue to remain near the quarter’s levels; it expected net interest expense to be higher in coming quarters.
Outlook, risks and unusual items
The Tax Act prompted provisional income-tax charges of $5.6 million for long-term deferred tax assets, $1.3 million for short-term deferred tax assets and $4.9 million for deemed repatriation. The final tax impact remained subject to further analysis and guidance.
FICO planned to adopt the new revenue standard in fiscal 2019 using retrospective transition, subject to systems and data readiness. It expected changes principally to the timing of certain on-premises license and guaranteed-minimum-fee revenue, contract-balance presentation and commission-cost accounting; it did not expect a significant timing effect on maintenance, professional services or SaaS revenue.
Key disclosed risks include dependence on banking and consumer-credit markets, major credit-reporting-agency relationships and distributors; competition, including from the three major credit bureaus; execution and adoption risks in cloud and decision-management offerings; data access, privacy, cybersecurity and system availability; regulation; international exposure; and variability in sales cycles and quarterly deal timing. FICO reported customer payment disputes, former-employee claims and other ordinary-course matters, but said it had no material aggregate exposure for matters with a reasonable possibility of loss.
Important facts for investors to verify
- How much of the net-income decline reflects provisional Tax Act charges, and how the final tax accounting changes.
- Whether bookings and bookings yield stabilize or continue to weaken, and how bookings convert into recognized revenue.
- Whether Decision Management Software revenue and segment losses improve as cloud investment continues.
- Debt repayment and refinancing capacity, including the May 2018 $131.0 million maturity, revolver usage and covenant headroom.
- Revenue concentration: banking accounted for 79% of quarterly revenue, and agreements with Equifax, TransUnion and Experian collectively accounted for 21%.