Fair Isaac Corporation (FICO) — FY2020 Form 10-K
Reporting period: Fiscal year ended September 30, 2020; fiscal fourth quarter ended that date. Amounts below are in U.S. dollars.
Business context
FICO provides analytics, decision-management software and credit-scoring products, including FICO Scores. Its reportable segments are Applications, Scores and Decision Management Software. Banking and consumer credit remain central: banking generated 86% of FY2020 revenue. FICO’s strategy emphasizes a cloud-enabled, platform-based business; cloud bookings were 41% of total bookings, versus 39% in FY2019.
Financial performance and liquidity
| Metric | FY2020 | FY2019 | Change |
|---|---|---|---|
| Revenue | $1,294.6 million | $1,160.1 million | +12% |
| Operating income / margin | $296.0 million / 22.9% | $253.5 million / 21.9% | Income +17% |
| Net income / net margin | $236.4 million / 18.3% | $192.1 million / 16.6% | Income +23% |
| Diluted EPS | $7.90 | $6.34 | +25% |
| Operating cash flow | $364.9 million | $260.4 million | +$104.6 million |
| Cash and cash equivalents | $157.4 million | $106.4 million | +$51.0 million |
FY2020 gross profit was $933.4 million, or approximately 72.1% of revenue, calculated as revenue less cost of revenues. Revenue by segment was Applications $602.0 million (flat year over year), Scores $528.5 million (+25%) and Decision Management Software $164.0 million (+22%). Scores operating income was $454.3 million; Decision Management Software recorded a $23.5 million operating loss, improved from a $35.1 million loss.
At September 30, 2020, working capital was $119.6 million, compared with negative $35.1 million a year earlier. Debt carrying value was $834.4 million, comprising $739.4 million long-term debt and $95.0 million current revolving-credit borrowings; senior notes had $750.0 million face value. The $400 million revolving facility matures in May 2023. FICO reported compliance with debt covenants and said available cash, credit capacity and expected operating cash flows should fund requirements.
Financing cash outflow was $289.4 million, including $235.2 million of share repurchases. Investing cash outflow was $24.6 million. The company had $224.8 million remaining under its $250 million repurchase authorization at year-end.
Material changes versus FY2019 and Q4 results
- Revenue growth was led by Scores, including higher mortgage volumes, pricing, a royalty true-up and a large annual license deal. Applications revenue was nearly unchanged; lower fraud and customer-communications revenue offset growth in compliance and origination solutions.
- SaaS revenue, including associated professional services, rose 11% to $300.0 million; SaaS subscription revenue rose 11% to $236.0 million.
- FICO recorded $45.0 million of restructuring and impairment charges: $28.0 million for operating-lease assets, $5.2 million for property and equipment, and $11.8 million for employee separations. The company eliminated 209 positions. It expects approximately $36 million in annual expense savings beginning FY2021.
- Q4 FY2020 revenue was $374.4 million, versus $305.3 million in Q4 FY2019. Q4 net income was $59.1 million versus $54.6 million; diluted EPS was $1.98 versus $1.80.
- FICO issued $350 million of 4.00% senior notes due 2028 in December 2019 and repaid the remaining $85 million of 2010 notes at maturity in July 2020. Senior notes at year-end also included $400 million of 5.25% notes due 2026.
Outlook, management commentary, risks and unusual items
- Management expects FY2021 revenue recognized from term software licenses to decline as FICO moves toward bundled software subscriptions; revenue will be recognized more over subscription terms. The company said this transition should not reduce cash flows.
- COVID-19 affected some customer purchasing decisions and reduced auto and unsecured credit originations; mortgage volumes benefited from refinancing activity and low interest rates. Management could not reliably quantify the pandemic’s future effects and noted possible further impairments, credit-loss allowances or restructuring actions.
- FICO cited concentration risks: 32% of FY2020 revenue came through its three major credit-reporting-agency relationships collectively, and 86% came from banking. It also highlighted economic sensitivity, competition, data access and privacy regulation, cybersecurity, cloud execution and long, variable sales cycles.
- In October 2020, FICO agreed to a five-year cloud-infrastructure arrangement with Rackspace, with a $120 million minimum purchase obligation over the first three years. This was disclosed as a subsequent event.
- The DOJ opened a civil investigation in March 2020 into potential exclusionary conduct; FICO said it was cooperating. The filing did not provide a clear estimate of potential financial exposure. Other customer, former-employee and ordinary-course claims were disclosed; the company said it did not have material aggregate exposure for matters with a reasonable possibility of loss.
- FICO said it divested its Cyber Risk Score business in October 2020. The auditor issued an unqualified opinion on the financial statements and internal controls; revenue recognition was identified as a critical audit matter because of contract complexity and judgment.
Most important facts for investors to verify
- Whether Scores growth, especially mortgage-related volume and pricing, remains durable after FY2020’s favorable conditions and one-time royalty and license items.
- Progress in SaaS and platform adoption, including the effect of bundled subscriptions on reported revenue timing and FY2021 comparisons.
- Execution and realized savings from the restructuring, alongside the $45.0 million charge and ongoing investment needs in cloud infrastructure.
- Debt, liquidity and covenant headroom, and the cash-flow implications of share repurchases and the Rackspace minimum commitment.
- Developments in the DOJ investigation, agency distribution relationships, COVID-19 impacts, and potential credit, privacy or cybersecurity exposures.