Fair Isaac Corporation (FICO) — Q2 FY2021 10-Q
Reporting period: Quarter and six months ended March 31, 2021; amounts below are in U.S. dollars. Comparisons are with the corresponding 2020 periods unless stated otherwise.
Business context and financial performance
FICO provides analytics, software, data-management solutions and credit scores. It reports three segments: Applications, Scores and Decision Management Software. Banking and consumer credit remain central markets: they represented 90% of quarterly revenue. Transactional or unit-based arrangements generated 85% of quarterly revenue.
| Metric | Q2 FY2021 | Change | Six months FY2021 | Change |
|---|---|---|---|---|
| Revenue | $331.4M | +8% | $643.8M | +6% |
| Operating income | $101.2M | +34% | $195.9M | +54% |
| Net income | $68.7M | +18% | $155.2M | +37% |
| Diluted EPS | $2.33 | vs. $1.94 | $5.23 | vs. $3.76 |
| Operating margin | 30.5% | vs. 24.6% | 30.4% | vs. 21.0% |
Quarterly revenue mix: transactional and maintenance $280.9M, professional services $37.8M, and license $12.6M. For the six-month period, operating income included a $7.3M gain on sale of product-line assets; the prior-year period included $3.1M of restructuring and impairment charges.
Cash, debt and liquidity
- Cash and cash equivalents were $197.8M at March 31, 2021, including $124.8M held by foreign subsidiaries; marketable securities were $30.4M.
- Six-month operating cash flow was $231.5M, compared with $121.9M. Investing activities provided $1.7M, versus $15.0M used, including $8.3M of proceeds from product-line asset sales. Financing activities used $196.8M, including $255.2M of share repurchases.
- Debt on the balance sheet totaled approximately $965.2M: $225.0M of revolving-credit borrowings and $740.2M of long-term debt. The $400M unsecured revolver expires May 2023; $225.0M was outstanding at a 1.236% weighted-average rate. FICO reported compliance with its financial covenants.
- Senior notes have $750M face value: $400M at 5.25%, due May 2026, and $350M at 4.00%, due June 2028. Management said cash, available revolver capacity and expected operating cash flows should be sufficient for working and other capital requirements.
- FICO repurchased approximately 541,738 shares for $255.2M in the six months. The March 2021 program authorizes up to $500M; $471.3M remained available at March 31.
Material changes and management commentary
- Scores drove growth: quarterly Scores revenue rose 31% to $168.7M and six-month revenue rose 28% to $313.4M. Management cited higher unit prices and increased auto and mortgage volumes, as well as consumer-score revenue growth.
- Applications and Decision Management Software weakened: combined revenue fell 9% in both the quarter and six-month period. Management attributed declines to the shift toward bundled term software subscriptions, which moves more revenue recognition over the contract term, fewer and smaller term-license deals in some areas, and a strategic emphasis on software over services. FICO expects the term-license recognition change to weigh on reported revenue through the rest of FY2021, but says it does not change contract-life revenue or negatively affect cash flows.
- Quarterly cost of revenue was 27% of revenue versus 29%, primarily reflecting the higher mix of higher-margin Scores products. Six-month SG&A declined 11%, partly due to reduced travel, marketing and commission costs and lower bad-debt expense. Research and development expense increased 8% for the six months.
- Bookings were $84.0M for the quarter, essentially flat with $84.1M a year earlier; six-month bookings fell to $152.1M from $196.2M. Management cautions that bookings are estimates, not backlog. Remaining performance obligations were $334.4M; approximately 50% was expected to be recognized over the next 20 months.
- On May 4, 2021, after quarter-end, FICO signed an agreement to sell its Collections and Recovery business to focus resources on the FICO Decision Management Platform. The sale was expected to close in the current fiscal year, subject to customary conditions. At March 31, the business was classified as held for sale, with $48.8M of assets and $24.0M of related liabilities. Management intended to include sale proceeds in a $200M accelerated share repurchase program after closing.
- The effective tax rate was 25.2% for the quarter and 13.7% for the six months, compared with 6.7% and a benefit rate of 8.5%, respectively, in the prior-year periods. The filing cites stock-award tax benefits as an influence on period comparisons.
Outlook, risks and contingencies
The filing provides no quantified full-year revenue or earnings forecast. Management expects the accounting timing change for bundled term subscriptions to pressure reported term-license revenue through the remainder of FY2021. It says liquidity is adequate under its current business plan. COVID-19 effects remain uncertain; the filing notes possible impacts from weaker lending and consumer activity, customer purchasing delays, employee and operational disruption, and changes in credit volumes.
Other highlighted risks include reliance on banking and consumer-credit markets and a limited number of significant customers and distributors; competition and execution of the cloud-enabled platform strategy; cybersecurity, data privacy and regulatory exposure; long and variable sales cycles; and risks of divestitures. Experian, TransUnion and Equifax represented 16%, 13% and 10% of quarterly revenue, respectively. FICO disclosed customer payment disputes, former-employee claims and other ordinary-course legal matters, but said it had no material aggregate exposure for matters with a reasonable possibility of loss. It reported $10.2M of unrecognized tax benefits at March 31.
Important facts for investors to verify
- Whether Scores growth and lending-volume trends continue, and how concentrated revenue remains in banking and the three credit bureaus.
- How the bundled-subscription revenue-recognition transition affects reported revenue, license sales and future comparisons.
- Bookings deterioration and conversion of the $334.4M remaining performance obligations into recognized revenue.
- Completion, proceeds and operating effects of the Collections and Recovery divestiture, including the proposed $200M accelerated repurchase.
- Cash generation, debt and covenant headroom while FICO continues substantial share repurchases; the $225M revolver borrowing and current-maturity classification are notable balance-sheet items.
- Ongoing COVID-19, credit-market, cybersecurity, privacy, regulatory, customer-concentration and litigation risks.