Business Context and Reporting Period
Company: Fair Isaac Corporation (FICO)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2010
Business Overview: FICO provides analytic, software, and data management products and services, including the industry-standard FICO score, to automate and improve business decisions. Primary clients include banks, credit reporting agencies, insurers, retailers, and healthcare organizations. Approximately 76% of revenues are derived from the banking and insurance industries.
Key Financial Metrics
| Metric | Q1 2010 | Q1 2009 | 6 Months 2010 | 6 Months 2009 |
|---|---|---|---|---|
| Total Revenues | $143.7 million | $159.3 million | $295.2 million | $322.8 million |
| Operating Income | $23.1 million | $30.4 million | $54.7 million | $50.7 million |
| Net Income | $13.0 million | $17.7 million | $30.7 million | $29.9 million |
| Diluted EPS | $0.28 | $0.36 | $0.65 | $0.61 |
| Cash & Equivalents | $190.9 million | $178.2 million (Sep 2009) | N/A | |
| Marketable Securities | $191.1 million | $201.0 million (Sep 2009) | N/A | |
| Total Debt | $570.0 million | $570.0 million (Sep 2009) | N/A | |
| Operating Cash Flow (6mo) | N/A | $70.0 million | $86.3 million |
Note: Debt consists of $295.0 million in revolving line of credit borrowings and $275.0 million in Senior Notes.
Material Changes vs. Prior Period
- Revenue Decline: Total revenues decreased 10% year-over-year for the quarter and 9% for the six-month period. This was driven by declines across all three segments: Applications (-12%), Scores (-5%), and Tools (-9%).
- Segment Drivers:
- Applications: Decreased due to lower originations and customer management solutions, partially offset by growth in marketing solutions (FICO Retail Action Manager). Divestitures of LiquidCredit and RoamEx product lines in June 2009 impacted year-over-year comparisons.
- Scores: Decreased primarily due to the termination of the Experian relationship with myFICO.com in February 2009 and reduced volumes in the U.S. financial credit market.
- Tools: Decreased due to lower license sales for the Blaze Advisor product and completion of large installations in prior periods.
- Expense Management: Cost of revenues decreased 17% quarter-over-quarter due to staff reductions and facility consolidations from the reengineering initiative. Restructuring expenses were $0 in the current period compared to $0.9 million in the prior year quarter.
- Operating Income: Decreased 24% for the quarter due to revenue declines, though the six-month operating income increased 8% due to significant cost reductions and the absence of prior-year restructuring charges.
- Stock Repurchases: The company repurchased 2.7 million shares for $57.5 million during the six months ended March 31, 2010.
Guidance, Outlook, and Risks
- Outlook: Management expects competitive pricing pressures and reduced volumes due to weakness in the U.S. financial credit market to continue adversely affecting revenues in fiscal 2010. The company anticipates cost of revenues as a percentage of revenues will decrease slightly in future quarters.
- Bookings: Bookings for the quarter ended March 31, 2010, were $54.3 million, an increase from $46.8 million in the prior year quarter.
- Reengineering Initiative: The company continues to aggressively manage expenses through headcount reductions and facility consolidations to maintain earnings and cash flows.
- Key Risks:
- Customer Concentration: Reliance on a small number of large customers and the three major credit reporting agencies (Equifax, Experian, TransUnion).
- Legal Proceedings: Ongoing litigation with credit reporting agencies regarding VantageScore; a jury ruled in favor of defendants in November 2009, and FICO plans to appeal.
- Economic Conditions: Continued volatility in global financial markets and reduced capital expenditures by customers.
- Goodwill Impairment: Ongoing uncertainty in economic conditions could lead to a decline in the fair value of reporting units, potentially requiring goodwill impairment charges.
Investor Verification Checklist
- Revenue Mix: Verify the sustainability of the 76% revenue concentration in banking and insurance sectors amidst ongoing financial market volatility.
- Customer Relationships: Assess the impact of the ongoing litigation with Equifax, Experian, and TransUnion on future distribution and revenue streams.
- Cost Structure: Confirm the long-term effectiveness of the reengineering initiative in maintaining margins as revenue growth remains challenged.
- Goodwill Valuation: Monitor the $661.9 million goodwill balance for potential impairment triggers given the "difficult market and economic conditions."
- Debt Covenants: Review compliance with leverage and fixed charge coverage ratios on the $600 million revolving credit facility and $275 million Senior Notes.