Business context and reporting period
Fair Isaac Corporation (FICO) filed this Form 10-K for the fiscal year ended September 30, 2010. FICO provides analytics, software, decision-management applications and credit-scoring products, including FICO Scores. Its reportable segments are Applications, Scores and Tools; the company reorganized from four segments to three effective October 1, 2009, and recast comparative segment data.
Fiscal 2010 Q4 refers to the quarter ended September 30, 2010; the filing’s principal results cover the full fiscal year.
Financial performance and liquidity
| Metric | FY 2010 | FY 2009 | Change |
|---|---|---|---|
| Revenue | $605.6 million | $630.7 million | -4% |
| Operating income | $113.3 million | $116.7 million | -3% |
| Net income | $64.5 million | $65.1 million | -1% |
| Diluted EPS | $1.42 | $1.33 | +7% |
| Operating cash flow | $105.8 million | $151.6 million | -30% |
| Operating margin | 18.7% | 18.5% | +0.2 percentage points |
| Cost of revenues as % of revenue | 29.9% | 32.7% | Improved |
FY 2010 Q4 revenue was $155.1 million, versus $151.9 million in the prior-year quarter. Net income was $15.8 million versus $17.1 million; diluted EPS was $0.38 versus $0.35.
FY 2010 revenue by segment: Applications $367.3 million (-4%); Scores $172.3 million (-4%); Tools $66.0 million (-3%). Applications operating income fell 17% to $93.3 million, Scores fell 9% to $110.7 million, and Tools rose 14% to $8.4 million.
At year-end, cash and cash equivalents were $146.2 million and marketable securities were approximately $73.0 million, totaling $219.2 million. Working capital was $225.0 million. Debt was $520.0 million in Senior Notes; the $295.0 million revolving-credit balance outstanding a year earlier was repaid after FICO issued $245.0 million of notes in July 2010. The $600 million revolving facility had no borrowings at year-end and expires in October 2011. Senior Notes have weighted-average rates of 6.8% on the 2008 issuance and 5.2% on the 2010 issuance. FICO reported no material off-balance-sheet arrangements.
FY 2010 capital returns included $198.0 million of share repurchases and $0.08 per share in dividends. The June 2010 repurchase authorization was $250 million, with $174.7 million remaining at year-end.
Material changes versus the prior comparable period
- Revenue declined $25.1 million. Transactional and maintenance revenue fell to $455.5 million from $478.7 million; professional-services revenue fell to $102.9 million from $112.4 million, while license revenue rose to $47.3 million from $39.6 million.
- Lower revenue was partly offset by cost reductions: cost of revenues fell $25.5 million and restructuring expense fell to $1.6 million from $8.7 million. SG&A increased $15.9 million, primarily due to personnel costs, commissions, travel and marketing.
- Operating cash flow decreased by $45.9 million, in part reflecting an $11.6 million increase in receivables, compared with a $31.3 million receivables decrease in FY 2009.
- Bookings were $283.3 million for FY 2010 versus $234.2 million in FY 2009. Fourth-quarter bookings were $105.6 million versus $85.9 million. Management cautions that bookings depend on estimates and are not backlog.
- FICO repaid its revolving borrowings and increased Senior Notes from $275 million to $520 million, extending the debt maturity profile. Total assets decreased to $1.124 billion from $1.304 billion, and stockholders’ equity decreased to $474.9 million from $600.3 million, with substantial share repurchases among the factors affecting equity.
Outlook, commentary, risks and unusual items
Management said economic conditions had stabilized in 2010, with business stabilizing in the latter half and signs of gradual improvement, but unemployment and housing weakness remained concerns and the global recovery was expected to be modest. FICO planned to continue expense management and invest in Decision Management solutions and core operations. It gave no specific FY 2011 revenue or earnings guidance in the cited text. It expected cost of revenues as a percentage of revenue to be consistent with or slightly higher than FY 2010; R&D percentage to be consistent with or slightly higher; SG&A percentage to be slightly higher; amortization to be slightly lower; and interest expense to be higher.
Goodwill was not impaired in the July 2010 annual test. Applications goodwill was $448.0 million, and its estimated fair value was 110% of carrying value. Management disclosed that a 13.5% decline in forecast cash flow or a 1.3-percentage-point increase in the discount rate would have caused the reporting unit to fail the first impairment-test step.
Key risks include dependence on banking and insurance customers (76% of FY 2010 revenue), credit-reporting-agency distribution relationships (Equifax, TransUnion and Experian together represented 20% of revenue), economic and credit-market conditions, long and variable sales cycles, competition, access to data, privacy and regulatory changes, cybersecurity and execution of the Decision Management strategy. FICO’s litigation involving Experian and VantageScore remained on appeal; appellate rulings were expected in mid-2011. Other disclosed customer, employment and legal claims were not expected by management to materially affect results, liquidity or financial condition, although potential losses could not be determined with certainty.
FY 2010 included $1.6 million of restructuring expense and a $0.6 million impairment of previously capitalized internal-use software. The company adopted revised revenue guidance for non-software multiple-deliverable arrangements; management said its effect on FY 2010 results was immaterial. The independent auditor gave an unqualified opinion on the financial statements and internal controls, which were reported effective.
Important facts for investors to verify
- Whether revenue and operating trends improved after FY 2010, particularly in Applications and Scores, and whether bookings convert to recognized revenue as expected.
- Current performance and renewal terms of distribution agreements with Equifax, TransUnion and Experian, including the impact of Experian’s earlier termination of its myFICO relationship.
- Debt covenants, maturity schedule and refinancing or liquidity needs, especially the revolving facility’s October 2011 expiry and scheduled Senior Note principal payments.
- Whether Applications’ goodwill valuation remains supported by actual revenue, margin and industry-recovery performance.
- Developments in the Experian/VantageScore appeals, tax audits and other contingencies, and any material changes in the associated exposures.
- Actual FY 2011 expense ratios, cash generation, repurchases and dividends relative to management’s stated expectations.