Fair Isaac Corporation (FICO) — Form 10-Q Summary
Business context and period: FICO provides analytics, software, data-management and credit-scoring products and services. This report covers the fiscal quarter and nine months ended June 30, 2014; comparisons are with the same periods in 2013 unless noted.
Financial performance
| Metric | Quarter | Nine months |
|---|---|---|
| Revenue | $197.6 million, up 8% | $567.4 million, up 3% |
| Operating income | $36.4 million, up 3%; 18.4% margin versus 19.2% | $110.4 million, down 1%; 19.5% margin versus 20.1% |
| Net income | $20.5 million, up 5% | $58.3 million, down 5% |
| Diluted EPS | $0.58 versus $0.54 | $1.65 versus $1.69 |
| Operating cash flow | Not separately provided for the quarter | $103.8 million versus $100.2 million |
Quarterly revenue growth was led by Applications, up 13% to $129.9 million. Scores declined 4% to $45.3 million, while Tools rose 4% to $22.4 million. For the nine months, Tools grew 13% and Scores 4%; Applications was essentially flat. Professional-services revenue increased 19% for the quarter and 9% year to date. License revenue rose 22% in the quarter but fell 4% year to date.
Quarterly cost of revenue was 32% of revenue, unchanged year over year. R&D increased to 12% of quarterly revenue from 10% and to 11% year to date from 9%, reflecting continued cloud and SaaS investment. The effective tax rate was 32.2% for the quarter and 34.4% year to date, versus 31.4% and 30.9%, respectively.
Balance sheet, debt and liquidity
- At June 30, cash and cash equivalents were $93.1 million, including $73.3 million held offshore; total assets were $1.186 billion.
- Balance-sheet debt was $530 million: $154 million in current maturities and $376 million in senior notes. The filing also reports $447 million of senior notes outstanding and $83 million drawn on the revolving credit facility. The $200 million unsecured revolver expires in September 2016, leaving $117 million undrawn; its borrowing rate was 1.282%.
- Current liabilities of $313.0 million exceeded current assets of $273.3 million. Management said cash, expected operating cash flows and available revolver borrowings should fund needs, including a $71 million senior-note principal payment due in May 2015. FICO was in compliance with debt covenants.
- FICO repurchased 2.77 million shares for $159.0 million during the nine months, and paid $2.1 million in dividends. Cash increased $9.9 million over the period.
- Cash used in investing was $14.3 million, including $7.3 million net cash paid for acquisitions and $7.1 million for property and equipment. InfoCentricity was acquired for $8.2 million in cash on April 1, 2014.
Material changes, outlook and risks
- Despite higher revenue, nine-month operating income and net income declined, while diluted EPS fell 2%. Higher R&D and share-based compensation contributed to expense growth. Applications and Scores segment operating income improved, but Tools segment income fell to $2.9 million from $13.1 million; Tools posted a quarterly operating loss of $2.5 million.
- Management expected cost of revenue as a percentage of revenue to remain consistent with or slightly above the June-quarter level over the next several quarters. It expected R&D spending as a percentage of revenue to remain consistent with or slightly above the quarter’s level; SG&A as a percentage of revenue was expected to be consistent with or slightly higher. Interest expense was expected to rise because of increased revolver borrowings. No numerical consolidated revenue or earnings guidance was provided.
- Bookings were $84.5 million for the quarter, up from $70.2 million, and $276.5 million year to date, versus $236.9 million. Management cautioned that bookings depend on estimates of transaction volumes, accounts and project hours, are not backlog, and may not translate into revenue on the expected schedule.
- Banking, including consumer credit, accounted for 72% of quarterly revenue and 74% year to date; international operations contributed 41% and 40%, respectively. Credit-reporting-agency agreements collectively represented about 14% of quarterly revenue and 15% year to date. These exposures, along with dependence on key distributors and customer transaction volumes, are important risks.
- Other disclosed risks include economic and financial-sector volatility, regulation and privacy requirements, competition (including from the major credit bureaus), data access, cybersecurity, product development and acquisition integration. FICO reported customer payment disputes, former-employee claims and other ordinary-course matters, but said it had no material aggregate exposure for matters with a reasonable possibility of loss. A nonrecurring fixed-asset charge contributed to the year-to-date change in other income/expense. The higher tax rate was primarily attributed to expiration of the U.S. federal R&D credit and a greater expected share of revenue in higher-tax jurisdictions.
Investor verification priorities
- Reconcile debt classification: the balance sheet shows $154 million current maturities and $376 million senior notes, while the notes separately report $447 million of senior notes and $83 million drawn on the revolver.
- Assess the funding plan for the $71 million May 2015 note payment, offshore cash, revolver availability and covenant headroom.
- Monitor whether cloud and SaaS investment—especially the Tools segment’s lower margins—produces revenue growth and improved profitability.
- Track revenue concentration, credit-bureau relationships, Scores volumes and pricing, and whether bookings convert to recognized revenue as estimated.
- Evaluate the effects of the higher effective tax rate, continued share repurchases, and the company’s stated expense and interest outlook.