Fair Isaac Corporation (FICO) — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended March 31, 2017; filed April 27, 2017. FICO provides analytics, software, decision-management products and services, including FICO Scores.
Financial performance
| Metric | Quarter ended Mar. 31, 2017 | Quarter ended Mar. 31, 2016 | Six months ended Mar. 31, 2017 | Six months ended Mar. 31, 2016 |
|---|---|---|---|---|
| Revenue | $228.4 million | $206.7 million | $448.0 million | $406.8 million |
| Operating income | $40.0 million | $38.5 million | $75.0 million | $69.4 million |
| Net income | $25.1 million | $23.1 million | $63.0 million | $42.4 million |
| Diluted EPS | $0.78 | $0.72 | $1.94 | $1.31 |
| Operating margin | 18% | 18% | 17% | 16% |
- Quarterly revenue grew 10%; six-month revenue also grew 10%. All three segments increased revenue. Applications grew 10% for the quarter and 11% year to date; Scores grew 7% in both periods; Decision Management Software grew 21% and 14%, respectively.
- Scores had the highest segment operating margin: 78% for both periods in 2017. Applications margin was 26%, down from 28%; Decision Management Software remained loss-making, with a quarterly operating loss of $2.5 million and six-month loss of $6.2 million.
- Six-month net income includes $20.9 million of excess tax benefits from share-based payments under newly adopted accounting guidance. The resulting reported effective tax rate was negative 1.9%, versus 24.3% a year earlier. Management says the benefit materially increased year-to-date net margin; tax rates may be more volatile in future periods.
Cash flow, balance sheet and capital allocation
- For the six months, operating cash flow was $99.4 million, versus $92.3 million; capital expenditures were $9.6 million, versus $7.8 million. Cash and cash equivalents rose to $115.8 million from $75.9 million at September 30, 2016.
- At March 31, 2017, total debt was approximately $625.7 million: $310.0 million drawn on the $400 million revolving facility and $315.7 million of senior notes. Cash less debt was approximately $509.9 million. The revolver’s weighted-average borrowing rate was 2.326%; FICO reported compliance with debt covenants.
- Current liabilities were $264.3 million and current assets $309.2 million. FICO cited sufficient cash, operating cash flow and available credit to meet requirements, including a $72.0 million senior-note principal payment due in July 2017. Of its cash, $101.6 million was held offshore.
- FICO repurchased 606,340 shares for $74.6 million during the six months; $155.4 million remained under the authorization. It paid a quarterly dividend of $0.02 per share.
Changes, outlook and risks
- Growth reflected, among other factors, increased scoring royalties and business-to-business scores, SaaS-related activity, and license sales, including large multi-year fraud-solutions licenses. Higher personnel, sales and infrastructure investment raised operating costs.
- Bookings were $91.2 million for the quarter, down from $132.5 million, and $187.6 million for six months, down from $218.9 million. Management cautions bookings are estimates and actual revenue and timing may differ. Quarterly weighted-average booking term fell to 26 months from 55 months.
- No specific revenue or earnings guidance is provided in the filing. Management expected cost of revenues, research and development, and selling, general and administrative expenses as a percentage of revenue to remain around second-quarter levels over the next several quarters; net interest expense was also expected to be consistent with the quarter. Amortization was expected to remain consistent with or below the quarter’s level.
- Key risks include reliance on banking and consumer-credit markets and a small number of products and distribution partners; the three major credit bureaus collectively represented about 20% of quarterly revenue. Other cited risks include competition, regulation and privacy requirements, cybersecurity and service interruptions, access to data, international and economic conditions, and execution of the Decision Management strategy.
- FICO disclosed customer payment disputes, former-employee claims and other ordinary-course legal matters; it stated that reasonably possible losses were not material in aggregate. No material off-balance-sheet arrangements were reported.
- FICO early adopted share-based payment accounting guidance, which affected tax expense and reported cash-flow classification. It planned to adopt the new revenue standard in fiscal 2019 using retrospective transition and was evaluating its impact.
Investor verification points
- Assess how much of reported earnings growth is repeatable after excluding the $20.9 million share-based tax benefit.
- Track bookings, booking terms and conversion into recognized revenue, particularly after the year-over-year bookings decline.
- Monitor segment margins and whether ongoing sales, delivery and cloud-infrastructure investment yields operating leverage.
- Verify repayment of the $72.0 million July 2017 note maturity and the effect of debt, offshore cash and continued share repurchases on liquidity.
- Review exposure to credit-bureau distribution relationships, regulatory changes, data access and cybersecurity risks.