Fair Isaac Corporation (FICO) — FY2015 Form 10-K
Reporting period: Fiscal year ended September 30, 2015. The filing also reports the quarter ended September 30, 2015; this is an annual report, not a standalone quarterly filing.
Business context
FICO provides predictive analytics, decision-management software and services, and credit scores. Its three segments are Applications, Scores and Tools. Revenue is substantially tied to transactional or unit-based fees, recurring maintenance and licenses; these arrangements represented 67% of revenue in both FY2015 and FY2014. Banking accounted for 69% of FY2015 revenue, and international customers accounted for 40%.
Financial results
| Metric | FY2015 | FY2014 | Change |
|---|---|---|---|
| Revenue | $838.8 million | $789.0 million | +6% |
| Operating income | $137.5 million | $161.9 million | -15% |
| Operating margin | 16% | 21% | -5 percentage points |
| Net income | $86.5 million | $94.9 million | -9% |
| Diluted EPS | $2.65 | $2.72 | -3% |
| Operating cash flow | $133.0 million | $175.0 million | Down $42.0 million |
Revenue by segment: Applications $526.3 million (+4%); Scores $207.0 million (+11%); Tools $105.5 million (+7%). Scores benefited from the Experian consumer-score partnership; Applications growth included fraud and TONBELLER compliance solutions. Tools operating income turned to a $6.4 million loss from $4.2 million income, reflecting elevated investment and delivery costs.
Cash used in investing was $81.9 million, including $57.0 million net cash paid for acquisitions and $25.0 million for property and equipment. Cash used in financing was $58.6 million. Cash and equivalents ended at $86.1 million, down from $105.1 million. Working capital was $42.7 million versus negative $52.9 million in FY2014; current assets were $286.6 million and current liabilities $243.9 million.
At year-end, senior notes totaled $376.0 million and revolving-credit borrowings were $232.0 million, for total debt of $608.0 million. Cash-adjusted debt was approximately $521.9 million. The $400 million revolving facility expires in December 2019; FICO reported covenant compliance. Scheduled FY2016 senior-note principal payment is $60 million. Stockholders’ equity was $437.0 million.
FICO repurchased approximately 1.7 million shares for $130.7 million during FY2015 and paid quarterly dividends of $0.02 per share. Research and development expense was $98.8 million, up 18%; share-based compensation was $45.3 million.
Material changes and unusual items
- Operating expenses rose 12%, faster than revenue. Restructuring and acquisition-related expense increased to $18.2 million from $4.3 million, including $13.6 million of facility-exit charges and $3.9 million of severance costs; 97 positions were eliminated.
- Management attributed lower operating margin to facility write-downs and exit costs, continued cloud/SaaS investment, and higher professional-services delivery costs. A nonrecurring charge also affected delivery costs on a large implementation project.
- The effective tax rate fell to 20.8% from 28.7%, primarily due to favorable state and foreign tax audit settlements and a federal R&D credit adjustment. Management said this helped offset the operating-income decline.
- FICO acquired TONBELLER in January 2015 for $59.6 million, adding financial-crime and regulatory-compliance products. The preliminary allocation included $46.1 million of goodwill; final valuation remained subject to completion.
- Foreign-currency translation reduced comprehensive income by $27.5 million. The filing reports no goodwill impairment in FY2015.
Quarter ended September 30, 2015
Revenue was $232.8 million versus $221.6 million in the year-earlier quarter. Net income was $33.3 million versus $36.6 million, and diluted EPS was $1.03 versus $1.10.
Outlook, risks and contingencies
The filing does not provide a clear full-year FY2016 revenue or EPS forecast. Management expected cost of revenue as a percentage of revenue to be consistent with or slightly below FY2015; R&D percentage to be consistent with or slightly lower; SG&A percentage to be consistent with or slightly higher; amortization slightly higher; and net interest expense lower. Management said cash, operating cash flow and available revolver capacity were expected to support operating needs and the FY2016 debt payment.
Key risks include dependence on credit-scoring, fraud and customer-management products; reliance on the three major credit bureaus, which collectively represented 16% of revenue; customer and banking-industry sensitivity to economic conditions; competition, including a rival score developed by the bureaus; data access, privacy and regulatory constraints; cybersecurity and service interruptions; and execution and integration risks from acquisitions and the cloud/Decision Management strategy. Sales cycles are long and quarter-end license activity can make results difficult to forecast.
FICO disclosed customer payment disputes, former-employee claims and other ordinary-course legal matters; it stated that aggregate exposure for matters with a reasonable possibility of loss was not material. The filing reports $4.6 million of unrecognized tax benefits and $103.5 million of operating-lease commitments. No material off-balance-sheet arrangements were reported.
Important facts for investors to verify
- Whether revenue growth can translate into margin recovery, particularly as Tools and cloud/SaaS investments develop.
- The recurring and transactional revenue outlook, including the durability of Experian-related consumer-score growth and bureau distribution relationships.
- TONBELLER integration, realized synergies and the final purchase-price allocation.
- Cash generation and capital allocation relative to debt maturities, repurchases and dividends.
- Exposure to banking-sector demand, regulatory or privacy changes, competition, and customer-data or cybersecurity incidents.