Fair Isaac Corporation (FICO) — Form 10-Q
Business context and reporting period: FICO provides analytics, software, credit scores and decision-management solutions. This filing covers the fiscal second quarter and six months ended March 31, 2011; comparisons are with the corresponding 2010 periods. Amounts below are in millions, except per-share data.
Financial results and liquidity
| Metric | Quarter ended March 31, 2011 | Quarter ended March 31, 2010 | Six months ended March 31, 2011 | Six months ended March 31, 2010 |
|---|---|---|---|---|
| Revenue | $152.8 | $143.7 | $308.8 | $295.2 |
| Operating income | $19.2 | $23.1 | $48.8 | $54.7 |
| Operating margin | 12.6% | 16.0% | 15.8% | 18.5% |
| Net income | $7.7 | $13.0 | $23.8 | $30.7 |
| Net margin | 5.1% | 9.0% | 7.7% | 10.4% |
| Diluted EPS | $0.19 | $0.28 | $0.59 | $0.65 |
| Operating cash flow | Not separately presented for the quarter | $59.6 | $70.0 |
- Quarterly revenue rose 6%; six-month revenue rose 5%. License revenue increased to $14.4 million from $6.1 million in the quarter, while transactional and maintenance revenue declined to $111.4 million from $113.7 million.
- Quarterly operating income fell 17% and net income fell 40%. The six-month declines were 11% and 23%, respectively. Results included restructuring charges of $11.5 million for the quarter and $12.4 million for six months; no comparable charges were reported in 2010.
- Cash and cash equivalents were $258.3 million at March 31, 2011, versus $146.2 million at September 30, 2010. Cash, cash equivalents and marketable securities totaled $263.4 million. Current assets were $381.1 million and current liabilities $125.8 million.
- Debt was approximately $520 million: $512 million of senior notes and $8 million of current maturities. The $200 million revolving credit facility had no borrowings outstanding and expires in October 2011. The company reported compliance with debt covenants.
- Six-month investing cash flow was positive $63.2 million, primarily reflecting net proceeds from sales and maturities of marketable securities. Financing cash flow was negative $12.9 million, including $19.3 million of share repurchases and $1.6 million of dividends.
Material changes and management commentary
- Applications revenue increased 10% for the quarter, led by fraud and originations solutions; Tools revenue increased 11%, mainly on license sales. Scores revenue declined 4%, reflecting lower transaction volumes through credit bureau and consumer channels.
- International revenue represented 39% of quarterly revenue, up from 33% a year earlier. Banking and insurance accounted for approximately 78% of quarterly revenue.
- Quarterly restructuring charges included $8.2 million for severance associated with eliminating 177 positions and $3.3 million for vacating excess leased space. Substantially all severance payments were expected by the end of fiscal Q3; facility costs are expected over seven years.
- Bookings were $57.7 million for the quarter, compared with $54.3 million. Six-month bookings were $141.7 million, compared with $114.2 million. Management cautions that bookings are estimates, not backlog, and actual revenue and timing may differ.
- Management described economic conditions as stabilized with signs of gradual improvement, but noted continued unemployment, a difficult U.S. housing market and a likely modest global recovery. It planned to manage expenses while investing in Decision Management solutions and core operations.
- Management expected cost of revenues as a percentage of revenue to be consistent or slightly lower, and R&D and SG&A as a percentage of revenue to be slightly lower than the March-quarter levels over the next several quarters. Interest expense was expected to remain near the quarter’s level. The filing provides no specific full-year revenue or earnings guidance.
Risks, contingencies and unusual items
- Management warned that prolonged economic weakness could reduce customer transaction activity and technology spending, lengthen sales cycles, pressure pricing and impair goodwill. The Applications reporting unit’s estimated fair value was 110% of carrying value at the July 2010 test; a 13.5% cash-flow decline or a 1.3 percentage-point increase in discount rate would have caused it to fail the first impairment-test step.
- FICO depends significantly on a limited number of products, large customers and the three major credit reporting agencies. Agreements with Equifax, TransUnion and Experian collectively represented approximately 18% of quarterly revenue. Competition, including the agencies’ VantageScore offering, could affect those relationships and sales.
- Unrecognized tax benefits were estimated at $13.0 million, with $1.5 million of related accrued interest. Management stated that ordinary-course claims and disputes were not expected to have a material adverse effect, but potential liabilities could not be determined with certainty.
- FICO’s appeal in its litigation involving Experian and VantageScore was pending, with rulings expected later in 2011. Separately, appeals remained possible in the Braun-related IPO class-action settlement, which required no financial contribution from FICO.
- Disclosure controls were assessed as effective, and no material change in internal control over financial reporting was identified.
Important facts for investors to verify
- Whether revenue growth, particularly license and Applications growth, continues and offsets weakness in Scores and recurring transaction-based revenue.
- How much of the decline in reported operating income reflects the one-time restructuring charge, and whether planned savings are achieved.
- The renewal, extension or replacement terms for the revolving credit facility expiring in October 2011, and the company’s capacity to service approximately $520 million of debt.
- Bookings assumptions and conversion into recognized revenue, given management’s warning that bookings are estimates rather than firm backlog.
- Developments in credit bureau relationships and litigation, goodwill impairment sensitivity, and resolution of uncertain tax positions.