Business context and reporting period
Fair Isaac Corporation (FICO) filed this Form 10-K for fiscal 2016, ended September 30, 2016. The filing also reports fourth-quarter results for the three months ended that date. FICO sells analytics, decision-management software and applications, and credit scores through its Applications, Scores, and Decision Management Software segments.
Financial results and key metrics
| Metric | FY 2016 | FY 2015 |
|---|---|---|
| Revenue | $881.4 million | $838.8 million |
| Operating income / margin | $169.6 million / 19% | $137.5 million / 16% |
| Net income | $109.4 million | $86.5 million |
| Diluted EPS | $3.39 | $2.65 |
| Cash from operations | $185.2 million | $133.0 million |
| Cash and cash equivalents at year end | $75.9 million | $86.1 million |
| Working capital at year end | $21.6 million | $42.7 million |
For Q4 FY 2016, revenue was $235.8 million, versus $232.8 million in Q4 FY 2015; net income was $32.1 million versus $33.3 million, and diluted EPS was $1.00 versus $1.03. Reported quarterly gross profit was $161.5 million versus $165.7 million; the filing’s gross-profit presentation excludes intangible-asset amortization.
Revenue mix in FY 2016: Applications $532.6 million (up 1%); Scores $241.1 million (up 16%); Decision Management Software $107.7 million (up 2%). Scores was the main growth contributor. FICO attributed improved operating margin principally to higher-margin score revenue, lower professional-services delivery costs, and no current-year restructuring charge. FY 2015 included $18.2 million of restructuring and acquisition-related expense.
Debt at September 30, 2016 comprised $316.0 million of senior notes and $255.0 million drawn on a $400 million revolving facility. Cash was $75.9 million, of which $63.1 million was held offshore. The company reported $21.6 million of working capital and compliance with debt covenants. Cash provided by investing activities was $27.6 million and cash used in financing activities was $165.0 million. FICO repurchased approximately 1.3 million shares for $138.4 million and paid quarterly dividends of $0.02 per share.
Material changes versus the prior comparable period
- FY 2016 revenue increased 5%, operating income increased 23%, and net income increased 27% year over year.
- Scores revenue growth reflected higher business-to-consumer revenue, including the Experian relationship, and increased business-to-business transactional scores. Applications growth was modest; fraud revenue declined $19.2 million, primarily due to fewer large multiyear license deals.
- Operating cash flow rose $52.2 million, mainly on higher net income and lower income tax payments. Investing cash outflow decreased as acquisition spending fell.
- The effective tax rate rose to 24.3% from 20.8%; FY 2015 benefited from favorable state-audit and transfer-pricing settlements.
- Revenue from Equifax, TransUnion, and Experian collectively increased to 19% of total revenue from 16%. International revenue declined to 36% of total from 40%.
Outlook, management commentary, risks and unusual items
Management gave no specific revenue or EPS guidance in the provided filing text. For FY 2017, it expected cost of revenue as a percentage of revenue to be consistent with or slightly above FY 2016; R&D spending as a percentage of revenue to be consistent with or slightly higher; SG&A as a percentage of revenue to be consistent; amortization expense to be slightly lower; and net interest expense to be lower. Management expected available cash, revolver capacity, and operating cash flow to cover working-capital needs and the $72 million senior-note payment due in July 2017. It expected to continue the current dividend rate, subject to Board review.
Management highlighted continued investment in cloud/SaaS products, decision-management offerings, and distribution, with additional investment in product delivery, support, and infrastructure expected in FY 2017. Annual bookings were $378.0 million versus $314.7 million; management cautioned that bookings are estimates, not backlog, and depend on factors such as transaction volume and service usage.
Key risks include reliance on scoring, fraud, and customer-management offerings; dependence on credit bureau distribution relationships and rising concentration of revenue through the three major bureaus; exposure to banking and insurance markets; intense competition; execution of cloud and decision-management strategies; access to data; cybersecurity and service interruptions; privacy and regulatory changes; and economic and foreign-exchange uncertainty, including Brexit-related uncertainty. The company reported customer and former-employee disputes and other ordinary-course claims, but stated it did not have material aggregate exposure for matters with a reasonable possibility of loss. No restructuring expense was recorded in FY 2016. The auditor issued an unqualified opinion on the financial statements and reported effective internal control over financial reporting.
Important facts for investors to verify
- Whether Scores growth and the Experian consumer distribution relationship remain durable, and how much revenue and profit depend on the three credit bureaus.
- Whether the Applications fraud-revenue decline and weak Decision Management Software profitability improve; that segment recorded a $3.7 million operating loss in FY 2016.
- Cash conversion and working-capital trends, alongside the $571 million of total debt, upcoming maturities, and revolving-credit covenants.
- How share-based compensation, which was $55.5 million in FY 2016, affects reported earnings and dilution, and whether repurchases offset share issuance.
- The impact of the higher FY 2016 tax rate, unrecognized tax benefits, and expected adoption of new accounting standards.
- Whether management’s FY 2017 expense expectations and planned investment translate into sustained margin and cash-flow performance.