Fair Isaac Corporation (FICO) — Form 10-Q summary
Reporting period: Fiscal second quarter and six months ended March 31, 2019; fiscal year ends September 30. Comparisons are with the corresponding 2018 periods, adjusted retrospectively for adoption of the revenue recognition standard. Dollar amounts below are in millions unless noted.
Business context and results
FICO provides analytics, software, decision-management products and credit scores to businesses and consumers. Its reportable segments are Applications, Scores and Decision Management Software (DMS).
| Metric | Quarter | Six months |
|---|---|---|
| Revenue | $278.2; up 9% | $540.5; up 11% |
| Operating income | $48.5; up 5% | $97.6; up 17% |
| Net income | $33.4; up 7% | $73.4; up 15% |
| Diluted EPS | $1.10 vs. $1.00 | $2.42 vs. $2.04 |
| Operating margin | 17.4% vs. 18.1% | 18.0% vs. 17.0% |
Quarter revenue growth was led by Scores, up 20% to $104.4, and DMS, up 41% to $32.0; Applications fell 3% to $141.8. For the six months, Scores rose 22% to $190.1 and DMS 31% to $60.9, while Applications increased 1% to $289.5. Scores gains reflected higher business-to-business score revenue, including higher unit prices in auto and mortgage activity. DMS growth included optimization-related services and license sales. Applications’ quarterly decline reflected lower implementation services and license sales. Cloud revenue rose 6% in the quarter to $66.8 and 9% in the six months to $130.2.
Cash flow, liquidity and debt
- Six-month operating cash flow was $96.6, versus $78.0 a year earlier. Capital spending was $10.6; investing cash outflow was $12.8.
- Financing cash outflow was $97.3, including $119.7 of share repurchases and $48.5 of taxes paid on net share settlement of equity awards. Cash declined $13.1 to $76.9; $60.7 was held offshore.
- At March 31, cash and current marketable securities totaled $95.8. Current liabilities were $436.6, exceeding current assets of $397.0 by $39.6; the reported figures imply a current ratio of approximately 0.91.
- Total debt carrying value was approximately $822.4: $315.0 outstanding under the $400 revolving facility and $513.0 of senior notes. Cash less debt implies net debt of approximately $745.5. The revolver’s weighted-average rate was 3.869%; the 2018 notes bear 5.25% and mature in 2026. FICO reported covenant compliance.
- Net interest expense rose 41% to $10.0 for the quarter and 45% to $19.7 for the six months, primarily due to higher average debt and the cost of the 2018 notes. The filing identifies a $28.0 principal payment on 2010 notes due in July 2019.
Changes, outlook, risks and unusual items
- Management attributed six-month earnings growth primarily to higher operating income, partly offset by increased interest expense. Quarterly Applications operating margin declined to 21% from 27%; Scores margin improved to 85% from 81%. DMS remained loss-making, with its quarterly segment loss narrowing to $8.4 from $9.0.
- Management expects cost of revenues, R&D, SG&A and amortization as percentages or levels to remain generally consistent with the March quarter over the next several quarters; it also expects net interest expense to be consistent with that quarter. No numeric full-year revenue or EPS guidance is provided in the supplied filing text.
- Management believes cash, operating cash flow and available revolver capacity will fund operating needs and the July 2019 debt payment. The company had $79.5 remaining under its $250.0 repurchase authorization at quarter-end.
- FICO adopted ASC 606 using the full retrospective method, changing timing for certain license and transactional revenue and gross presentation of certain receivables and deferred revenue. Comparisons reflect the restated 2018 figures. Adoption also led to capitalization and amortization of eligible SaaS contract acquisition commissions.
- Material business risks include dependence on banking and credit-related markets, a small number of products and distributors, and the three major credit reporting agencies; agency relationships collectively represented a substantial share of revenue. Other cited risks include competition, cloud-strategy execution, privacy and cybersecurity, regulation, data access, economic conditions, and lengthy and variable sales cycles.
- The company disclosed customer payment disputes, former-employee claims and other ordinary-course matters; it stated that reasonably possible legal losses were not material in aggregate. The six-month effective tax rate was 4.9%, affected by excess tax benefits on vested stock awards and, in the prior-year comparison, the Tax Act. FICO had not yet selected an accounting policy for GILTI taxes.
Important facts for investors to verify
- Whether Scores growth and higher score pricing persist, and how concentrated revenue remains with credit bureaus and banking customers.
- Whether Applications revenue and margins recover, and whether DMS can reduce its operating losses while funding cloud and product investment.
- Debt repayment and refinancing plans, interest costs, covenant headroom, and the effect of buybacks on liquidity and leverage.
- Cash conversion, including the contribution from non-cash share-based compensation to operating cash flow, and the availability of offshore cash for U.S. needs.
- How revenue recognition changes and unusually low interim tax rates affect comparability and future reported results.
- At April 19, 2019, 28,990,026 common shares were outstanding, excluding treasury shares; compare this with the impact and pace of repurchases.