Business Context and Reporting Period
Company: Fair Isaac Corporation (FICO)
Filing Type: Form 10-K (Annual Report)
Period Ended: September 30, 2009
Business Overview: FICO provides predictive analytics and Decision Management (DM) solutions, including the industry-standard FICO score, to automate and improve business decisions for banks, insurers, retailers, and healthcare organizations. The company operates through four segments: Strategy Machine Solutions, Scoring Solutions, Professional Services, and Analytic Software Tools. Effective October 1, 2009, the company restructured into three segments: Scores, Applications, and Tools.
Key Financial Metrics
| Metric | Fiscal 2009 | Fiscal 2008 | Change |
|---|---|---|---|
| Total Revenues | $630.7 million | $744.8 million | (15.3%) |
| Operating Income | $116.7 million | $122.3 million | (4.5%) |
| Net Income | $65.1 million | $84.0 million | (22.5%) |
| Diluted EPS | $1.33 | $1.70 | (21.8%) |
| Operating Margin | 18.5% | 16.4% | +210 bps |
| Net Cash from Operations | $151.6 million | $159.2 million | (4.8%) |
| Cash & Equivalents | $178.2 million | $129.7 million | +37.4% |
| Total Debt | $570.0 million | $570.0 million | 0% |
Note: Total Debt consists of $295.0 million in revolving credit facility borrowings and $275.0 million in Senior Notes.
Material Changes vs. Prior Period
- Revenue Decline: Total revenues decreased by $114.1 million (15%) primarily due to difficult global economic conditions, reduced new account acquisition activities by financial institutions, and unfavorable currency translation ($18.3 million impact).
- Strategy Machine Solutions: Revenues fell $49.4 million (13%) due to declines in collections, customer management, and fraud solutions, as well as the divestiture of the RoamEx product line.
- Scoring Solutions: Revenues fell $25.2 million (16%) driven by a $20.3 million reduction in volumes from credit reporting agencies.
- Professional Services: Revenues fell $36.7 million (25%) as customers slowed contracted services and the company exited lower-margin engagements.
- Cost Management: Despite revenue declines, operating income remained relatively stable due to aggressive cost-cutting. Operating expenses decreased by $108.6 million (17%).
- Restructuring: The company incurred $8.7 million in restructuring charges in 2009 (vs. $10.2 million in 2008) related to the elimination of 255 positions and facility consolidations.
- Share-Based Compensation: Decreased to $19.9 million from $27.7 million in 2008.
- Divestitures: The company sold the LiquidCredit for Telecom (LCT) and RoamEx product lines in June 2009 for $6.2 million, recognizing a $3.0 million pre-tax loss. The Insurance Bill Review business unit was classified as discontinued operations following its sale in 2008.
Guidance, Outlook, and Risks
- Outlook: Management expects the difficult business environment to continue through most of fiscal 2010. They anticipate cost of revenues as a percentage of revenues will be slightly less than fiscal 2009, while R&D and SG&A expenses will be consistent with or slightly higher than fiscal 2009 levels.
- Goodwill Impairment Risk: The company holds $667.6 million in goodwill. While annual testing in July 2009 showed fair values exceeded carrying values, management warns that continued economic deterioration could trigger future impairment charges.
- Key Risks:
- Customer Concentration: 76% of revenues are derived from consumer credit, banking, and insurance industries, which are highly sensitive to economic downturns.
- Competitive Litigation: Ongoing litigation with TransUnion, Experian, and VantageScore regarding competitive credit scoring products. A jury ruled in favor of defendants in November 2009; FICO plans to appeal.
- Dependency on Distributors: Significant reliance on the three major credit reporting agencies (Equifax, TransUnion, Experian), which collectively accounted for 19% of total revenues.
Investor Verification Checklist
- Goodwill Valuation: Verify the assumptions used in the goodwill impairment test, specifically regarding future cash flow projections for the Strategy Machine Solutions segment ($501.9 million goodwill).
- Legal Proceedings: Monitor the status of the appeal regarding the VantageScore litigation and potential financial impact.
- Customer Concentration: Assess the stability of relationships with the three major credit reporting agencies and the impact of their own competitive scoring products (VantageScore).
- Reengineering Progress: Track the realization of the $30 million in annual cost savings targeted from the January 2009 headcount reductions.
- Debt Covenants: Confirm compliance with leverage and fixed charge coverage ratios under the $600 million revolving credit facility and $275 million Senior Notes.