Fair Isaac Corporation (FICO) — Form 10-Q Summary
Business context and reporting period. FICO provides analytics, software and data-management products, including credit scores and decision-management solutions. This fiscal 2021 third-quarter filing covers the quarter and nine months ended June 30, 2021; comparisons are with the corresponding 2020 periods. Unless stated otherwise, dollar amounts below are in millions.
Financial performance
| Metric | Q3 FY2021 | Q3 FY2020 | Nine months FY2021 | Nine months FY2020 |
|---|---|---|---|---|
| Revenue | $338.2 | $313.7 | $982.0 | $920.2 |
| Operating income | $194.4 | $82.9 | $390.3 | $210.5 |
| Net income | $151.2 | $64.1 | $306.4 | $177.3 |
| Diluted EPS | $5.18 | $2.15 | $10.38 | $5.92 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $332.1 | $228.7 |
Q3 revenue grew 8%; nine-month revenue grew 7%. Operating income and net income rose sharply, substantially reflecting gains from asset sales and the Collections and Recovery (C&R) divestiture, rather than revenue growth alone. The C&R sale generated a $92.8 million Q3 operating gain; total gains on product-line asset sales and divestitures were $100.1 million for the nine months. Q3 operating margin was about 57% versus 26% a year earlier, elevated by the gain.
- Revenue mix: Scores revenue increased 31% in Q3 to $172.2 million and 29% for nine months to $485.6 million. Applications revenue fell 6% in Q3 and 8% year to date; Decision Management Software revenue fell 20% and 11%, respectively.
- Segment profitability: Scores operating margin was 85% in Q3 and 86% year to date. Decision Management Software recorded operating losses of $15.2 million in Q3 and $40.2 million for nine months; its margins worsened to negative 47% and negative 41%, respectively.
- Other earnings factors: Q3 effective tax rate was 19.5% versus 15.9%; nine-month rate was 16.7% versus 1.8%. The current nine-month rate included tax from the C&R gain; prior-period results benefited from excess tax benefits on stock awards.
Cash, debt and liquidity
At June 30, 2021, cash and cash equivalents were $237.6 million, including $186.4 million held by foreign subsidiaries. Current assets were $556.9 million and current liabilities $544.8 million. Total debt carrying value was approximately $1.06 billion: $316.0 million outstanding on the $400 million revolving facility and $750 million face value of senior notes, carried net of issuance costs. Revolver borrowings carried a 1.216% weighted-average rate; senior notes bear interest at 5.25% and 4.00%, maturing in 2026 and 2028. FICO reported compliance with debt covenants.
Nine-month cash from investing activities was $137.6 million, including $146.4 million of divestiture proceeds. Financing used $394.6 million, including $541.2 million of share repurchases, partly offset by net revolver borrowing. Cash increased $80.2 million from September 30, 2020. Management said cash, available revolver capacity and expected operating cash flows should be sufficient for working and other capital needs, and reported no significant debt obligations maturing in the next 12 months.
Material changes, outlook and risks
- FICO completed the C&R sale on June 7, 2021, stating that the divestiture supports focusing development and sales resources on its Decision Management Platform. It also recorded gains from other asset sales during the nine-month period.
- FICO’s transition from separate term-license and maintenance arrangements to bundled software subscriptions was substantially completed by the end of fiscal Q1. Management expects this to reduce revenue recognized upfront from term licenses through the rest of fiscal 2021, while increasing recognition over subscription terms; it said the change does not affect total contract revenue or cash flows.
- Management is emphasizing software over professional services. It attributed declines in Applications and Decision Management Software partly to this shift, altered license-revenue timing, and fewer or smaller term-license deals.
- Bookings, which management describes as estimates and not backlog, were $75.5 million in Q3 versus $106.2 million, and $227.6 million for nine months versus $302.4 million. Management cautions actual revenue and timing may differ materially from booking estimates. The filing provides no numerical revenue or earnings guidance.
- COVID-19 effects remain uncertain and could influence customers’ lending activity, purchases, sales cycles and payments. Other significant risks include reliance on banking and credit-scoring markets, dependence on the three major credit bureaus and other distributors, competition, execution of the cloud/platform strategy, cybersecurity and data privacy, and regulatory changes.
- FICO entered a $200 million accelerated share-repurchase agreement in June; final shares and average price were expected to be determined at settlement in fiscal Q4. The filing also reports customer payment disputes, former-employee claims and ordinary-course legal matters; it states no material aggregate exposure for matters with a reasonable possibility of loss.
Important facts for investors to verify
- How much of reported earnings growth came from the $92.8 million C&R gain and other divestiture gains, and how results look excluding those items.
- Whether Scores growth and high segment margins continue, and whether Applications and Decision Management Software revenue declines and Decision Management Software losses improve.
- Bookings’ decline and the expected revenue-recognition impact of bundled term subscriptions, including how these affect subsequent reported results.
- Debt presentation and maturities: the balance sheet lists $250 million of current debt maturities, while management says there are no significant debt obligations due in the next 12 months; clarify the classification and timing.
- Liquidity after substantial repurchases, final settlement of the ASR, covenant headroom, and the accessibility of cash held by foreign subsidiaries.
- Exposure to the three credit bureaus: their agreements represented 39% of Q3 revenue (17%, 12% and 10%, respectively), according to the filing.