Fair Isaac Corporation (FICO) — Q1 Fiscal 2015
Reporting period: Three months ended December 31, 2014; comparable period is the three months ended December 31, 2013. Amounts are in U.S. dollars. FICO provides analytics, software, data management, and credit-scoring products and services.
Financial performance
| Metric | Q1 FY2015 | Q1 FY2014 | Change |
|---|---|---|---|
| Revenue | $189.6 million | $184.3 million | +3% |
| Operating income | $24.9 million | $35.3 million | -29% |
| Operating margin | 13.1% | 19.1% | -6.0 percentage points |
| Net income | $14.4 million | $17.0 million | -15% |
| Diluted EPS | $0.43 | $0.47 | -9% |
| Operating cash flow | $1.4 million | $28.4 million | Down $27.0 million |
Revenue by segment: Applications was $115.5 million (+3%); Scores was $43.9 million (-7%); Tools was $30.1 million (+19%). Tools growth included a one-time customer settlement for under-reported royalties. Segment operating income fell across all three segments: Applications to $26.6 million, Scores to $31.0 million, and Tools to $0.6 million.
Cost of revenues rose 16% to $66.3 million, equal to 35% of revenue versus 31% a year earlier. R&D increased 25% to $22.6 million and SG&A increased 9% to $72.8 million. The company attributed higher costs to consulting and labor, increased headcount, cloud/SaaS and product development investment, and a company-wide marketing event. The prior-year quarter included $3.7 million of restructuring and acquisition-related charges; none were recorded this quarter.
Cash, debt, and liquidity
- Cash and cash equivalents were $94.7 million at December 31, 2014, including $74.0 million held offshore. Cash declined $10.4 million during the quarter.
- Cash from operations was $1.4 million, primarily reflecting incentive-compensation payments and higher income-tax payments. Investing used $5.6 million, chiefly for $5.7 million of property and equipment purchases. Financing used $2.0 million; share repurchases were $60.6 million.
- Balance-sheet debt was $607.0 million: $231.0 million in current maturities and $376.0 million in long-term senior notes. The filing separately reports $160.0 million outstanding on the revolving facility and $447.0 million carrying value for senior notes, including current maturities.
- FICO refinanced and expanded its unsecured revolving credit facility from $200 million to $400 million, expiring December 30, 2019. Revolver borrowings were $160 million at a 1.295% weighted-average rate, leaving $240 million of nominal capacity. The company reported compliance with financial covenants.
- Senior notes had $447.0 million carrying value and $464.5 million fair value. FICO identified a $71.0 million principal payment due in May 2015 and said cash, available credit, and anticipated operating cash flows should be sufficient for requirements and that payment.
- Current assets were $279.9 million and current liabilities were $365.7 million. The resulting current ratio was approximately 0.77. These balances include current debt maturities.
Material changes, outlook, and notable items
- Bookings were $69.6 million versus $82.9 million, down 16%. Bookings yield was 32% versus 24%; average term was 21 months versus 23 months. Management regards bookings as an indicator, not backlog, and notes actual revenue and timing can differ from estimates.
- Applications revenue gains came mainly from collections and recovery and originations; Scores weakness reflected lower Global FICO Score software revenue and lower consumer-direct and royalty revenue. Tools growth included the one-time royalty settlement.
- The effective tax rate fell to 21.4% from 37.5%, primarily due to retroactive extension of the U.S. federal R&D tax credit through 2014.
- Management expected cost of revenues and R&D as a share of revenue over the next several quarters to be consistent with or slightly below Q1 levels; SG&A was expected to remain consistent, and net interest expense was expected to be similar. No specific consolidated revenue or EPS guidance was provided in the supplied filing text.
- FICO repurchased approximately 844,000 shares for $60.6 million under its $250 million authorization, with $189.4 million remaining. It paid a quarterly dividend of $0.02 per share and said it expected to continue at that rate, subject to board review.
- On January 12, 2015, after quarter-end, FICO acquired TONBELLER, a financial-crime and compliance solutions provider. Management said the pro forma impact was not expected to be material.
- Risks include dependence on banking and consumer-credit markets, major customers and credit-reporting-agency distribution relationships; competition, including competing scores developed by the three major bureaus; data access, privacy, security and regulatory requirements; long and variable sales cycles; and execution and integration risks from acquisitions. The filing disclosed customer payment disputes, former-employee claims, and ordinary-course legal matters; it said reasonably possible losses were not material in aggregate. Unrecognized tax benefits were estimated at $5.3 million.
Most important facts for investors to verify
- Whether revenue growth and bookings trends persist, particularly in Scores, and whether Tools growth repeats without the royalty settlement.
- Whether increased operating costs and segment margin declines stabilize as management expected.
- Whether operating cash flow recovers from the quarter’s $1.4 million level and supports the May 2015 $71 million note payment, repurchases, dividends, and acquisition spending.
- Debt classification and maturities, remaining revolver availability, and continued covenant compliance.
- TONBELLER’s integration, performance, and financial contribution, alongside exposure to customer disputes and tax uncertainties.