Business Context and Reporting Period
Company: Fair Isaac Corporation (FICO)
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter and nine months ended June 30, 1999
Business Overview: The Company provides data-driven decision-making tools, including credit scoring, risk management software, and consulting services. Key markets include consumer credit, insurance, direct marketing (DynaMark), and healthcare information. A significant portion of revenue is derived from alliances with major credit bureaus and bankcard processors.
Key Financial Metrics
| Metric (in thousands) | Nine Months Ended June 30, 1999 |
Nine Months Ended June 30, 1998 |
Three Months Ended June 30, 1999 |
Three Months Ended June 30, 1998 |
|---|---|---|---|---|
| Revenues | $204,092 | $177,808 | $67,241 | $64,642 |
| Net Income | $21,485 | $15,854 | $6,973 | $6,399 |
| Diluted EPS | $1.49 | $1.11 | $0.49 | $0.45 |
| Operating Cash Flow | $19,548 | $28,797 | N/A | N/A |
| Cash & Equivalents (End of Period) | $12,825 | $16,757 | $12,825 | N/A |
| Working Capital | $58,443 | $54,852 | N/A | N/A |
| Total Liabilities | $51,196 | $56,163 | N/A | N/A |
Note: Cash flow data is provided for the nine-month period only. Working capital increased from $54.9 million to $58.4 million.
Material Changes vs. Prior Period
- Revenue Growth: Nine-month revenues increased 15% year-over-year, driven by a 37% increase in DynaMark revenues and 12% growth in usage-priced credit revenues. Quarterly revenues grew 4%.
- Profitability: Net income rose 36% for the nine-month period and 9% for the quarter. Operating margins improved due to a 2% decrease in General and Administrative expenses as a percentage of revenue.
- Cost Structure: Cost of revenues increased as a percentage of revenue (from 35% to 38% in the nine-month period) due to a shift toward lower-margin products.
- Capital Allocation: The Company repurchased approximately 290,204 shares of common stock for $10.3 million through August 6, 1999, under a new stock repurchase program.
- Backlog: The backlog of orders for fixed-priced products declined by an additional $10.8 million during the nine months ended June 30, 1999.
Guidance, Outlook, and Risks
- Strategic Focus: Management announced a strategic shift to pursue opportunities in healthcare, telecommunications, and e-business while maintaining focus on financial services.
- Year 2000 (Y2K) Issues:
- Remediation costs incurred through June 30, 1999, totaled approximately $4.7 million, with total expected costs capped at $5 million.
- Internal systems are deemed Y2K ready; however, risks remain regarding third-party dependencies (credit bureaus, processors).
- Customer purchasing patterns have slowed due to Y2K preparation, potentially impacting near-term revenue.
- Accounting Changes: The Company intends to adopt SOP 98-9 (Software Revenue Recognition) in fiscal year 2000. Had it been adopted earlier, nine-month 1999 revenue would have been approximately $6.0 million lower.
- Liquidity: Management believes cash on hand and operating cash flows are sufficient to meet capital needs, including a synthetic lease for a new office complex expected to commence in fiscal 2001.
- Constraints: Long-term revenue growth is limited by the ability to recruit and absorb professional staff.
Investor Verification Checklist
- Backlog Trends: Verify the impact of the $10.8 million decline in fixed-price product backlog on future revenue recognition.
- Y2K Contingency: Assess the status of contingency plans for third-party service providers (credit bureaus/processors) and potential litigation risks.
- Revenue Mix: Monitor the shift toward lower-margin products and its effect on future operating margins.
- Accounting Impact: Review the financial impact of the upcoming adoption of SOP 98-9 in fiscal year 2000.
- Stock Repurchases: Confirm the remaining authorization and execution of the $10 million stock repurchase program.