Fair Isaac Corporation (FICO) — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended June 30, 2018; comparison is with the corresponding 2017 periods. FICO provides analytics, credit scores, decision-management software and related services.
Financial performance
Amounts below are in millions of dollars except per-share data and percentages.
| Metric | Quarter 2018 | Quarter 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Revenue | $259.5 | $231.0 | $752.7 | $679.0 |
| Operating income | $48.4 | $41.4 | $136.4 | $116.4 |
| Operating margin | 18.6% | 17.9% | 18.1% | 17.1% |
| Net income | $32.4 | $25.2 | $91.9 | $88.2 |
| Diluted EPS | $1.04 | $0.78 | $2.93 | $2.73 |
| Operating cash flow | Not separately reported | Not separately reported | $163.1 | $171.4 |
- Quarter revenue rose 12%; operating income grew 17% and net income 28%. Nine-month revenue and operating income increased 11% and 17%, respectively, while net income rose 4%.
- Quarter revenue by type: transactional and maintenance $195.5 million, professional services $43.2 million, and license $20.8 million. Scores revenue was $92.1 million, up 32%; Applications revenue was $141.6 million, up 6%; Decision Management Software revenue was $25.8 million, down 7%.
- Scores drove much of the growth, with higher mortgage-related scoring prices and higher consumer-score royalties cited. Decision Management Software weakness reflected lower license revenue, particularly for FICO Blaze Advisor.
- Cloud revenue in Applications and Decision Management Software was $58.1 million in the quarter, or 35% of non-Scores revenue, versus $51.2 million, or 32%, a year earlier.
- Quarter diluted EPS increased to $1.04 from $0.78. Nine-month EPS was $2.93 versus $2.73. The nine-month tax rate rose to 21.1% from 9.2%, with the prior-year comparison and 2018 results affected by tax items.
Cash, liquidity and debt
- Cash and cash equivalents were $119.9 million at June 30, 2018, including $96.6 million held by foreign subsidiaries. Current assets were $335.3 million and current liabilities $397.2 million; the resulting current ratio was approximately 0.84.
- Nine-month operating cash flow was $163.1 million. Capital expenditures were $24.2 million, implying operating cash flow less capital expenditures of approximately $138.9 million. Cash increased $14.3 million during the period.
- Total debt carrying value was approximately $758.7 million: $202.0 million current maturities and $556.7 million long-term debt. Debt was higher than the $604.8 million reported at September 30, 2017.
- FICO issued $400 million of 5.25% senior notes due 2026, used proceeds in part to repay the 2008 notes at maturity and reduce revolving-credit borrowings, and amended its unsecured revolver. The facility capacity is $400 million, with an option to increase by $100 million; $252 million was outstanding at a weighted-average rate of 3.201%. The revolver maturity was extended to May 2023. FICO reported compliance with debt covenants.
- Nine-month share repurchases totaled $231.5 million for approximately 1.4 million shares. A new $250 million repurchase authorization was approved in July 2018.
Outlook, commentary and risks
- FICO stated that cash, available revolver borrowings and expected operating cash flows should be sufficient for working and other capital needs. It provided no specific revenue or earnings guidance in the supplied filing text.
- Management expected cost of revenue, R&D and SG&A as percentages of revenue to remain broadly consistent with the June quarter over the next several quarters; it expected net interest expense to be higher than in that quarter.
- Bookings were $119.9 million for the quarter, compared with $95.5 million a year earlier, but bookings yield declined to 14% from 19%. Management cautioned that bookings depend on estimates and actual revenue and timing may differ.
- The Tax Act reduced the U.S. federal corporate rate and resulted in provisional charges, including $5.6 million for long-term deferred tax assets, $4.4 million for short-term deferred tax assets and $4.9 million for transition tax. The final impact remained subject to estimation.
- Management highlighted risks from dependence on banking and credit-related markets, a limited number of major customers and distributors, including the three credit reporting agencies, cloud-strategy execution, competition, data access and privacy regulation, cybersecurity and service interruptions, and economic and foreign-exchange volatility. Experian represented 12% of quarter revenue; Equifax and TransUnion together represented 15%.
- FICO reported customer and former-employee disputes and other ordinary-course legal matters; it stated that reasonably possible losses were not material in aggregate. No off-balance-sheet arrangements with a material effect were reported.
- FICO planned to adopt the new revenue standard in fiscal 2019, preliminarily using retrospective transition. It expected changes principally to timing for certain on-premises license revenue, contract-balance presentation and commission-cost accounting; the financial impact was still under review.
Most important facts for investors to verify
- Whether Scores growth and mortgage-related pricing remain durable, and how much growth depends on the major credit reporting agencies.
- Whether weakness and operating losses in Decision Management Software improve as license revenue and cloud investments develop.
- How revenue, contract balances and reported historical periods change upon adoption of Topic 606.
- Debt levels, refinancing needs, interest expense and covenant headroom following the 2018 notes issuance and buybacks.
- The final Tax Act accounting impact and any subsequent developments in customer, employee or other legal matters.