Fair Isaac Corporation (FICO) — Form 10-Q Summary
Business context and reporting period
FICO provides analytics, software and data-management products, including credit scores and decision-management solutions. This filing covers the fiscal quarter and six months ended March 31, 2013; comparisons are with the corresponding 2012 periods. Financial amounts below are in millions unless noted.
Financial performance and liquidity
| Metric | Quarter ended Mar. 31, 2013 | Quarter ended Mar. 31, 2012 | Six months ended Mar. 31, 2013 | Six months ended Mar. 31, 2012 |
|---|---|---|---|---|
| Revenue | $179.3 | $159.5 | $369.3 | $329.9 |
| Operating income | $33.2 | $38.2 | $76.2 | $90.3 |
| Net income | $18.5 | $20.0 | $41.9 | $50.0 |
| Diluted EPS | $0.51 | $0.55 | $1.15 | $1.36 |
| Operating margin | 18.5% | 23.9% | 20.6% | 27.4% |
- Quarter revenue rose 12%. Transactional and maintenance revenue was $126.4 million, professional services $34.1 million and license revenue $18.8 million.
- Applications revenue grew 22% in the quarter, chiefly reflecting Adeptra-related mobility growth and a large fraud-software license transaction. Scores revenue was down 1% and Tools revenue down 5%.
- Operating income fell 13% for the quarter and 16% year to date as operating expenses grew faster than revenue. Quarterly cost of revenue increased to 33% of revenue from 30%; SG&A rose to 38% from 36%. Higher acquisition-related costs, personnel, data/software costs and amortization contributed. Six-month results also included $3.3 million of restructuring and acquisition-related charges.
- Effective tax rates were 27.1% for the quarter and 30.6% for six months, down from 32.6% and 31.8%, respectively. The company attributed the decline primarily to reinstatement of the U.S. federal R&D credit.
- Six-month operating cash flow was $69.0 million, down from $83.5 million. Investing activities used $23.5 million, including $28.4 million net cash paid for CR Software; financing activities provided $15.9 million. Cash and cash equivalents were $131.2 million at March 31, up $59.5 million from fiscal year-end.
- At March 31, current assets were $285.2 million and current liabilities $191.3 million. Debt included $49 million of current maturities and $455 million of senior notes; the notes’ carrying value was $504 million. The $200 million revolving facility was undrawn, and FICO reported compliance with debt covenants. A $49 million principal payment was due in May 2013.
Material changes and management commentary
- Revenue growth was concentrated in Applications; six-month Applications revenue increased 17%, while Scores grew 1% and Tools 9%. FICO cited acquisitions and increased demand in mobility, collections and recovery, and customer-management solutions.
- Quarter bookings were $84.8 million versus $78.4 million a year earlier; six-month bookings were $166.8 million versus $137.6 million. Management cautioned that bookings are estimates, are not backlog, and may differ from actual revenue and timing.
- FICO said it expects cost of revenue, R&D and SG&A as percentages of revenue over the next several quarters to be consistent with the March 2013 quarter. Amortization was expected to be slightly lower and interest expense lower following the May debt payment. No specific full-year revenue or earnings guidance is provided in the filing.
- Management believed available cash, operating cash flows and the revolver would be sufficient for working and capital requirements, including the May 2013 note payment. It noted that future financing may not be available on favorable terms if needed.
Risks, contingencies and unusual items
- Approximately 74% of quarterly revenue came from consumer banking. The three major credit bureaus collectively represented about 15% of quarterly revenue, including revenue recorded in other segments. FICO also cited exposure to customer concentration, industry conditions, regulation, competition, data access, cybersecurity, product development and acquisition integration.
- International revenue was 39% of both quarterly and six-month revenue. Foreign currency translation reduced six-month comprehensive income by $14.4 million; quarterly translation adjustments were negative $13.0 million.
- FICO reported customer disputes over amounts owed, former-employee claims and other ordinary-course legal matters. It said it had no material aggregate exposure for matters with a reasonable possibility of loss.
- CR Software was acquired in November 2012 for $29.6 million cash. On April 1, 2013, after quarter-end, FICO acquired Infoglide for approximately $7 million; the company did not expect a material pro forma impact.
- FICO reported effective disclosure controls and no material change in internal control over financial reporting during the period.
Important facts for investors to verify
- Whether Applications growth, particularly acquisition-driven mobility and the large fraud license transaction, is repeatable and translates into sustained margins.
- Whether integration of Adeptra and CR Software, rising operating costs and lower-margin product mix continue to pressure profitability.
- Repayment of the $49 million note maturity and subsequent cash generation; the company reported an undrawn $200 million revolver at quarter-end.
- Bookings conversion and customer usage assumptions, since management says bookings are estimates rather than backlog.
- Dependence on consumer banking, major credit bureaus and access to data, as well as regulatory, cybersecurity and acquisition-related risks.