Business context and reporting period
Fair Isaac Corporation (FICO) provides analytics, decision-management software and services, including credit scores. This unaudited Form 10-Q covers the quarter and nine months ended June 30, 2010, the third quarter of fiscal 2010. Unless stated otherwise, amounts are in millions of dollars.
Financial performance and liquidity
| Metric | Quarter ended June 30, 2010 | Prior-year quarter | Nine months ended June 30, 2010 | Prior-year nine months |
|---|---|---|---|---|
| Revenue | $155.3 | $156.0 | $450.5 | $478.8 |
| Operating income | $31.1 | $33.2 | $85.8 | $83.9 |
| Net income | $17.9 | $18.1 | $48.6 | $48.0 |
| Diluted EPS | $0.40 | $0.37 | $1.04 | $0.98 |
- Quarterly operating margin was approximately 20.0%, versus 21.3% a year earlier; net margin was approximately 11.5%, versus 11.6%.
- Quarterly revenue was nearly flat year over year. Transactional and maintenance revenue fell to $115.9 from $119.5, and professional services to $25.5 from $28.4; license revenue rose to $13.9 from $8.1.
- For the nine-month period, revenue declined 5.9%, while operating income rose 2.2% and net income rose 1.3%. Diluted EPS increased as weighted-average diluted shares fell to 46.6 million from 48.8 million.
- Operating cash flow was $84.0, down from $124.3 in the prior-year period. Investing activities provided $40.3; financing activities used $187.2. Capital expenditures were $12.7.
- At June 30, cash and cash equivalents were $112.6 and marketable securities totaled $148.2. Current assets were $371.8 and current liabilities $128.6.
- Debt at June 30 included $245.0 drawn on the revolving credit facility and $275.0 of senior notes, including $8.0 classified as current maturities. The company reported covenant compliance. On July 14, it issued $245.0 of new senior notes at a weighted-average rate of 5.20% and used the proceeds to repay the revolver.
Material changes versus the prior comparable period
- Quarterly Applications revenue declined 3% to $91.4, with lower customer-management and origination activity and services partly offset by license growth and stronger fraud and marketing solutions. Scores revenue increased 3% to $46.5, but the filing says this included a royalty-fee true-up; excluding it, Scores revenue would have declined. Tools revenue rose 8% to $17.4.
- Nine-month revenue fell across all three segments: Applications by 6% to $271.2, Scores by 5% to $130.6 and Tools by 8% to $48.8.
- Quarterly operating income declined 6%, mainly reflecting lower Applications and Scores segment income and higher SG&A, partly offset by lower cost of revenue and the absence of prior-year restructuring and product-sale loss charges. Nine-month operating income improved despite lower revenue, aided by expense reductions and the absence of prior-year restructuring and sale-related charges.
- FICO repurchased 6.2 million shares for $139.5 million during the nine months and paid $2.8 million in dividends. A new $250 million repurchase authorization was approved in June; $233.2 million remained at quarter-end.
- International revenue was 35% of quarterly revenue, up from 30% a year earlier, and 34% for the nine months, up from 31%.
Outlook, commentary, risks and unusual items
- Management said some business, including Scores, showed signs of stabilization, but long sales cycles continued to weigh on license and services revenue; it expected these conditions to continue through fiscal 2010. Management planned to manage expenses while continuing investment in Decision Management and core operations.
- Management expected cost of revenue as a percentage of revenue and R&D spending to remain broadly consistent with the June quarter; SG&A to increase slightly; and amortization to be slightly lower. These are expense expectations, not full-year revenue or earnings guidance.
- The July debt refinancing replaces low-rate revolver borrowing (0.8% at June 30) with notes carrying a 5.20% weighted-average rate. Management estimated quarterly interest expense would increase by approximately $2.7 million and earnings decline by about $0.04 per share.
- Bookings were $63.5 million in the quarter and $177.7 million for nine months, compared with $49.0 million and $148.2 million, respectively, a year earlier. Management cautioned that bookings are not equivalent to backlog: some contracts are terminable and estimates include variable-fee components.
- Key risks include financial-sector weakness, competitive and pricing pressure, long and variable sales cycles, dependence on major credit-reporting-agency relationships and access to data, regulatory and privacy changes, and potential goodwill impairment. Goodwill was $660.8 million; management noted continued monitoring amid economic uncertainty.
- FICO’s litigation against Experian and VantageScore followed an adverse jury verdict on certain claims; FICO appealed, with rulings expected in mid-2011. Other customer, employment and ordinary-course claims were disclosed without estimable potential losses. A separate Braun-related securities class-action settlement required no company contribution but remained subject to appeal.
- There were no restructuring expenses in the quarter or nine-month period. The filing reported approximately $12.1 million of unrecognized tax benefits at June 30, plus $1.1 million of accrued interest.
Important facts for investors to verify
- Whether Scores revenue and bookings convert into recurring revenue, particularly given the royalty true-up, prescreen weakness and management’s warning that bookings are not backlog.
- The effects of weaker financial-market activity, customer concentration and credit-reporting-agency relationships on future segment revenue and margins.
- The realized interest-cost and earnings impact of the July refinancing, and ongoing compliance with debt covenants.
- Cash generation and liquidity after substantial share repurchases, including the use of the remaining repurchase authorization.
- Whether economic conditions or segment performance trigger goodwill impairment, and how litigation appeals and uncertain tax positions develop.