Fair Isaac Corporation — Form 10-Q Summary
Reporting period: Fiscal first quarter ended December 31, 2015; comparisons are with the quarter ended December 31, 2014 unless otherwise noted. FICO provides analytics, software, data-management solutions and credit scores for businesses and consumers.
Financial performance
| Metric | Q1 FY2016 | Q1 FY2015 | Change |
|---|---|---|---|
| Revenue | $200.1 million | $189.6 million | Up 6% |
| Operating income | $30.8 million | $24.9 million | Up 24% |
| Operating margin | 15% | 13% | Up 2 percentage points |
| Net income | $19.2 million | $14.4 million | Up 34% |
| Diluted EPS | $0.59 | $0.43 | Up 37% |
| Operating cash flow | $40.6 million | $1.4 million | Up $39.2 million |
Revenue by segment: Applications $120.1 million, up 4%; Scores $56.0 million, up 27%; and Tools $23.9 million, down 21%. Scores growth reflected higher consumer and business-to-business scoring revenue, including the Experian.com distribution agreement. Applications benefited partly from the TONBELLER acquisition. Tools revenue declined as the prior-year quarter included a one-time customer royalty settlement.
Transactional and maintenance revenue was $147.1 million, up 12%; professional services revenue was $34.2 million, down 3%; and license revenue was $18.9 million, down 18%. Net income benefited from higher revenue and lower cost of revenues as a share of sales. Selling, general and administrative expense rose 8%, including higher labor and share-based compensation; research and development expense rose 9%.
Cash, debt and capital allocation
Cash and cash equivalents were $90.7 million at December 31, 2015, including $65.7 million held offshore. Operating cash flow was substantially higher year over year, mainly due to the timing of customer receipts and operating payments, lower prior-year incentive payments and lower income tax payments. Investing cash use was $4.3 million, primarily for property and equipment. Financing cash use was $31.2 million, including $28.4 million of common-stock repurchases and $0.6 million of dividends.
Total debt was approximately $619 million: $243 million outstanding on the revolving credit facility and $376 million of senior notes. The revolving facility has a $400 million commitment and expires in December 2019; its reported weighted-average borrowing rate was 1.756%. FICO reported compliance with debt covenants. The company expected available cash, operating cash flows and credit-facility availability to fund requirements, including a $60 million senior-note principal payment due in July 2016.
During the quarter, FICO repurchased 318,502 shares under its program for $28.4 million; $90.9 million remained authorized. The company paid a quarterly dividend of $0.02 per share and said it expected to continue at the current rate, subject to the board’s judgment.
Changes, outlook and risks
- Management attributed stronger operating income to revenue growth and lower segment operating expenses, partly offset by increased share-based compensation and corporate expenses. Scores and Applications segment operating income rose; Tools moved from $0.6 million of operating income to a $1.4 million operating loss.
- Management expected cost of revenues as a percentage of sales to remain consistent with or slightly above the quarter’s level; R&D and SG&A percentages were expected to remain consistent with or slightly below it. Net interest expense was expected to be consistent with or slightly lower than the quarter. These are expense expectations, not full-year revenue or EPS guidance.
- Bookings were $86.4 million versus $69.6 million, while bookings yield fell to 26% from 32%. Bookings are estimates of signed contract value and may differ materially from revenue ultimately realized. Average booking term was 24 months versus 21 months.
- International revenue was 33% of total revenue versus 39%; banking-industry revenue was 76% versus 68%. Agreements with Equifax, TransUnion and Experian collectively generated about 19% of revenue versus 15%.
- Key disclosed risks include dependence on scoring and other principal offerings, major customers and credit-reporting-agency distribution relationships; competition, including competing scores developed by the three agencies; data access, privacy, security and regulatory requirements; economic conditions affecting banking and credit markets; and execution, integration and impairment risks related to acquisitions and new products.
- FICO disclosed customer disputes over amounts owed, former-employee compensation and employment claims, and other ordinary-course matters. It stated that reasonably possible losses were not material in the aggregate. Unrecognized tax benefits were approximately $5.4 million at quarter-end.
Important facts for investors to verify
- Whether Scores growth and the Experian distribution relationship are durable, and how revenue concentration with the three major credit bureaus evolves.
- Whether the lower bookings yield translates into revenue growth, given the estimates and timing assumptions in FICO’s bookings measure.
- Cash generation quality: the large year-over-year operating cash-flow increase was substantially attributed to timing of receipts and payments.
- Debt repayment and liquidity, particularly the $60 million July 2016 note payment, revolver usage and covenant headroom.
- Whether the Tools segment returns to profitability following the prior-year one-time royalty settlement and current revenue decline.
- Potential effects of customer and employee disputes, uncertain tax positions, foreign exchange movements and share-based compensation on future results.