Fair Isaac Corporation (FICO) — Q1 FY2021 10-Q
Reporting period: Quarter ended December 31, 2020; comparisons are with the quarter ended December 31, 2019 unless noted. FICO provides analytics, software, data-management and credit-scoring products and services. The filing is unaudited.
Financial performance
| Metric | Q1 FY2021 | Prior-year quarter | Change |
|---|---|---|---|
| Revenue | $312.4 million | $298.5 million | +5% |
| Operating income | $94.7 million | $51.9 million | +83% |
| Net income | $86.5 million | $54.9 million | +57% |
| Diluted EPS | $2.90 | $1.82 | +59% |
| Operating cash flow | $77.9 million | $60.4 million | +$17.6 million |
- Operating margin was approximately 30.3%, versus 17.4%; net margin was approximately 27.7%, versus 18.4%.
- Revenue by segment: Scores $144.7 million (+26%); Applications $135.4 million (-11%); Decision Management Software $32.4 million (+4%). Scores generated $123.0 million of segment operating income, with an 85% segment margin. Applications margin was 26%, up from 24%; Decision Management Software’s operating loss narrowed to $14.8 million.
- Cash and cash equivalents were $144.7 million at December 31, 2020, including $97.7 million held by foreign subsidiaries. Current assets were $508.4 million and current liabilities $391.0 million.
- Debt totaled approximately $870.8 million carrying value: $131.0 million outstanding on the revolving facility and $739.8 million of long-term debt. The $750.0 million face value of senior notes had a disclosed fair value of $816.0 million. FICO reported compliance with debt covenants.
- Capital expenditures were $3.0 million; operating cash flow less capital expenditures was approximately $74.9 million. Cash declined $12.7 million during the quarter, while financing activities used $99.8 million, including $50.0 million of share repurchases and $85.7 million of taxes paid on net share settlement of equity awards.
Material changes and unusual items
- Transactional and maintenance revenue increased to $252.2 million; license revenue fell to $18.8 million from $34.1 million, and professional services revenue declined to $41.4 million from $44.0 million.
- Scores growth reflected increased business-to-business scoring, including higher mortgage volumes and unit pricing in unsecured originations, and higher consumer services revenue. Applications weakness was concentrated in fraud solutions and license revenue.
- FICO’s shift from separately sold term licenses and maintenance to bundled software subscriptions was substantially completed by quarter-end. The change defers more revenue over contract terms and is expected to weigh on recognized term-license revenue through the rest of FY2021; management said it does not change total contract revenue or negatively affect cash flows.
- Operating results included a $7.3 million gain on sales of product-line assets. FICO sold its cyber risk score operations and certain Applications and Decision Management Software assets in China; management described the net gain from both transactions as immaterial to the financial statements.
- The effective tax rate was 1.7%, versus a benefit rate of 31.1% in the prior-year quarter, with both periods affected by excess tax benefits on stock awards. The reported tax rate and net income are therefore not directly comparable without considering these items.
Liquidity, outlook and risks
- Management said available cash, the $400 million revolving credit facility and anticipated operating cash flows were expected to fund working and other capital needs. The facility expires May 8, 2023; $131.0 million was drawn at a weighted-average rate of 1.284%. FICO reported no significant debt maturities over the next 12 months.
- Bookings were $68.1 million, down from $112.1 million; the number of bookings over $1 million fell to 11 from 25. FICO cautioned that bookings are estimates, are not comparable to revenue, and are not backlog.
- Remaining performance obligations were $337.7 million; approximately 50% was expected to be recognized over the next 20 months, with the balance thereafter. This measure excludes certain usage-based and other variable revenue.
- No specific revenue or earnings guidance was provided in the filing. Management emphasized its cloud-enabled, platform-based software strategy and portfolio focus, while noting uncertainty from COVID-19 and its effects on customers, lending activity and the economy.
- Key disclosed risks include economic and COVID-19 impacts on banking and credit activity; dependence on scoring products, major customers and the three credit bureaus; competition and execution of the cloud/software-subscription transition; cybersecurity, data privacy and regulatory exposure; and uncertain sales cycles. Experian, TransUnion and Equifax represented 14%, 11% and 9% of quarterly revenue, respectively.
- FICO disclosed customer payment disputes, former-employee claims and other ordinary-course legal matters; it said aggregate exposure for matters with a reasonable possibility of loss was not material. The DOJ closed its civil investigation into potential exclusionary conduct in December 2020 without enforcement action.
Investor verification priorities
- Track whether Scores growth offsets continued Applications weakness and the expected term-license revenue-recognition headwind.
- Examine bookings and large-deal trends alongside remaining performance obligations, recognizing that bookings are estimates and exclude some future revenue sources.
- Assess earnings quality and comparability, including the asset-sale gain, unusually low effective tax rate and stock-based compensation.
- Monitor liquidity, debt, covenant compliance, foreign-held cash and capital returns, including the remaining repurchase authorization of approximately $174.8 million.
- Review developments in COVID-19 effects, credit bureau relationships and concentration, data/cybersecurity risks, and regulatory or customer disputes.