Business context and reporting period
Fair Isaac Corporation (FICO) provides analytics, software, data-management products and services, including FICO Scores. This Form 10-Q covers the quarter and six months ended March 31, 2015, the second quarter of fiscal 2015. Unless stated otherwise, amounts below are in millions of dollars.
Key financial results
| Metric | Quarter ended Mar. 31, 2015 | Quarter ended Mar. 31, 2014 | Six months ended Mar. 31, 2015 | Six months ended Mar. 31, 2014 |
|---|---|---|---|---|
| Revenue | $207.1 | $185.5 | $396.7 | $369.8 |
| Operating income | $34.4 | $38.7 | $59.3 | $74.0 |
| Net income | $18.9 | $20.8 | $33.3 | $37.7 |
| Diluted EPS | $0.58 | $0.59 | $1.01 | $1.06 |
| Operating margin | 16.6% | 20.9% | 14.9% | 20.0% |
- Quarter revenue grew 12%; six-month revenue grew 7%. Quarterly revenue growth was led by Applications, up 16%, including strong fraud-related license sales and TONBELLER contribution. Scores rose 4% in the quarter; Tools rose 4%.
- Quarterly net income fell 9% and six-month net income fell 12%, despite higher revenue. Operating expenses grew faster than revenue; cost of revenues rose to 34% of revenue from 31% in both comparison periods.
- Quarterly diluted EPS was slightly lower year over year; six-month diluted EPS decreased 5%. Lower effective tax rates partly offset weaker pre-tax income.
- Operating cash flow was $43.3, versus $75.1 in the prior-year half. Capital expenditures were $10.3; net cash used in investing was $66.8, including $56.6 for TONBELLER.
- Cash and equivalents were $86.8 at March 31, 2015, down from $105.1 at September 30, 2014. Current assets were $301.8 and current liabilities $256.1.
- Total debt was $658.0: $211.0 drawn on the $400.0 revolving facility and $447.0 of senior notes. The filing reports covenant compliance. The company expected to pay $71.0 of senior-note principal in May 2015.
Material changes and unusual items
- Applications revenue increased $18.8 in the quarter, primarily from $16.2 higher fraud-solution revenue driven by a few multi-year licenses; TONBELLER added $3.2 to compliance revenue after its January acquisition.
- Tools recorded a one-time customer settlement for previously under-reported royalties, contributing to six-month revenue growth. Tools generated an operating loss of $5.2 in the quarter and $4.6 for the half, compared with profits in the prior-year periods, as spending rose on cloud products, new tools and services delivery.
- Scores’ six-month revenue declined 1% and segment operating income declined 10%, reflecting lower software revenue and higher expenses. FICO attributed consumer-services growth in part to its Experian agreement launched in December 2014.
- TONBELLER was acquired for $59.6 cash consideration. The preliminary allocation included $46.2 of goodwill, assigned to Applications; the goodwill is not tax deductible. Purchase accounting remained subject to revision.
- FICO repurchased 1.384 million shares for $100.7 during the six months, with $149.3 remaining under its $250.0 authorization. It paid a quarterly dividend of $0.02 per share.
- Foreign-currency translation reduced comprehensive income by $19.1 in the quarter and $30.5 for the six months.
Outlook, management commentary and risks
- Management expected cost of revenues, R&D, and SG&A as percentages of revenue over the next several quarters to be consistent with or slightly below the March-quarter levels; it expected net interest expense to be lower than in that quarter. The filing gives no specific revenue or EPS forecast.
- Bookings were $79.6 for the quarter, down from $109.1, and $149.2 for the half, down from $192.0. Management views bookings as an indicator, not backlog: estimates depend on transaction volumes, active accounts, service hours and contract terms, and actual revenue timing may differ.
- Management said cash, operating cash flows and available revolver borrowings should cover working-capital needs and the May debt payment; it did not anticipate repatriating foreign subsidiary earnings in the foreseeable future.
- Key disclosed risks include reliance on banking and credit-related markets, a limited number of major customers and distribution partners (including the three credit bureaus), competition including competing bureau scores, sales-cycle and bookings-estimation uncertainty, data access and privacy, cybersecurity, regulatory changes, international exposure, and acquisition integration and valuation risks.
- The company disclosed customer payment disputes, former-employee claims and other ordinary-course matters; it stated that reasonably possible losses were not material in aggregate. No restructuring accrual remained at March 31.
Investor verification points
- Assess whether license-driven fraud growth and the Tools royalty settlement are repeatable, and track bookings conversion and contract timing.
- Monitor operating margins, professional-services delivery costs, headcount and cloud/product-development spending, particularly in Tools.
- Verify post-acquisition TONBELLER revenue contribution, integration progress and final purchase-price allocation.
- Review cash generation, working-capital movements, the May 2015 $71.0 debt payment, revolver utilization and covenant headroom.
- Track Scores performance and the contribution and sustainability of Experian and other credit-bureau relationships.