Fair Isaac Corporation (FICO) — FY2014 Form 10-K
Reporting period: Fiscal year ended September 30, 2014. The filing also reports the quarter ended September 30, 2014 (FY2014 Q4). FICO provides analytics, software, decision-management applications and credit scores; its three segments are Applications, Scores and Tools.
Financial performance and position
| Metric | FY2014 | FY2013 | Change |
|---|---|---|---|
| Revenue | $789.0 million | $743.4 million | +6% |
| Operating income / margin | $161.9 million / 21% | $161.6 million / 22% | Income approximately flat; margin down |
| Net income | $94.9 million | $90.1 million | +5% |
| Diluted EPS | $2.72 | $2.48 | +10% |
| Operating cash flow | $175.0 million | $136.1 million | +$38.9 million |
- FY2014 Q4: Revenue was $221.6 million versus $190.3 million a year earlier; net income was $36.6 million versus $28.6 million; diluted EPS was $1.10 versus $0.79. Reported quarterly gross profit was $150.5 million versus $133.5 million; the filing’s cost-of-revenues measure excludes separately reported intangible amortization.
- Segment revenue: Applications $504.3 million (+6%), Scores $186.5 million (+3%) and Tools $98.3 million (+14%). Tools operating income fell to $4.2 million from $19.5 million, principally reflecting heavier cloud-platform and modeling-product investment.
- Cash and liquidity: Cash and equivalents were $105.1 million, including $83.8 million held offshore. Working capital was negative $52.9 million, versus positive $83.3 million in FY2013; current debt maturities rose to $170.0 million from $23.0 million.
- Debt: Total reported principal was $546.0 million: $447.0 million in senior notes and $99.0 million drawn on a $200 million revolving facility. The revolver carried a 1.285% weighted-average rate at year-end; FICO reported covenant compliance. A $71.0 million senior-note principal payment was due in May 2015.
- Cash uses and returns: Investing cash outflow was $19.8 million and financing cash outflow was $130.4 million. FICO repurchased approximately 3.7 million shares for $214.9 million during FY2014 and had $250 million authorized for further repurchases at year-end. Quarterly dividends were $0.02 per share.
Changes versus the prior comparable period
- International revenue increased 13% to $331.7 million and represented 42% of revenue, up from 40%. Revenue from transactional or unit-based arrangements was approximately 67%, down from 69%.
- Revenue growth included two large multi-year fraud-software license deals and increased customer-communications activity. Tools revenue grew fastest, but its segment margin contracted sharply as FICO invested in cloud and SaaS.
- Operating margin declined from 22% to 21%, with higher R&D and share-based compensation among the pressures. R&D rose 25% to $83.4 million; share-based compensation was $36.4 million versus $25.9 million.
- Bookings for the year increased to $362.3 million from $328.2 million, while bookings yield declined to 38% from 42%. Q4 bookings were $85.8 million versus $91.3 million. Management cautions that bookings are estimates, not backlog, and actual revenue timing and amounts can differ.
Outlook, risks and notable items
- Management expected FY2015 cost of revenues, R&D and SG&A as percentages of revenue to be generally consistent with FY2014; R&D investment in cloud and SaaS was expected to continue. Net interest expense was expected to decline, partly because of the scheduled May 2015 note payment. The filing provides no specific FY2015 revenue or EPS guidance.
- Management cited cloud-based offerings, the Decision Management Platform and Score Open Access as growth initiatives. More than 30 million consumers had access to a free FICO Score through participating clients, with management expecting that number to exceed 60 million in early 2015.
- FICO acquired InfoCentricity for $8.2 million in cash in April 2014 and acquired Karmasphere technology. The acquisitions were intended to strengthen cloud analytics and Big Data capabilities.
- FY2014 restructuring charges were $4.1 million, including severance related to eliminating 88 positions. No goodwill impairment was recorded; management said reporting-unit fair values substantially exceeded carrying values.
- Key risks include reliance on banking and credit markets, major credit-bureau distribution partners, access to data, intense competition, long and variable sales cycles, regulatory and privacy requirements, cybersecurity and service interruptions, and execution and integration risks from acquisitions. The three major credit bureaus collectively accounted for 15% of revenue; banking and insurance together accounted for 77%.
- FICO disclosed customer payment disputes, former-employee claims and other ordinary-course matters; it stated that reasonably possible legal losses were not material in aggregate. Potential indemnification payments under certain agreements are not capped, though the company reported no significant historical obligations and did not expect significant future obligations.
Important facts for investors to verify
- Whether Tools investment converts into sustained revenue and operating-margin improvement, and whether cloud/SaaS offerings gain customer adoption.
- Whether FY2014 revenue growth and bookings translate into recurring, realized revenue; assess the lower bookings yield and Q4 bookings decline.
- Debt classification and near-term liquidity: reconcile the $170 million current debt maturities with total principal, the revolver draw and the scheduled 2015 payment.
- Cash availability: distinguish the $83.8 million held offshore from domestic cash and assess the company’s stated plans to retain foreign earnings.
- Exposure to credit-bureau partners and banking-sector demand, including competitive pressure from the bureaus’ jointly developed scoring product.
- Potential effects of tax audits, unrecognized tax benefits, contractual commitments and legal matters; the filing does not quantify a material aggregate reasonably possible legal loss.