Business Context and Reporting Period
Company: Fair Isaac Corporation (FICO)
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2009
Business Overview: FICO provides analytic, software, and data management products and services enabling businesses to automate and improve decisions. Key segments include Strategy Machine Solutions, Scoring Solutions, Professional Services, and Analytic Software Tools. The company serves financial institutions, insurers, retailers, and government agencies.
Key Financial Metrics
| Metric | Q1 2009 | Q1 2008 | YTD 2009 | YTD 2008 |
|---|---|---|---|---|
| Revenues | $159.3 million | $193.2 million | $322.8 million | $383.3 million |
| Operating Income | $30.4 million | $28.5 million | $50.7 million | $62.8 million |
| Net Income | $17.7 million | $13.5 million | $29.9 million | $33.7 million |
| Diluted EPS | $0.36 | $0.28 | $0.61 | $0.67 |
| Operating Cash Flow (YTD) | $86.3 million | $70.3 million | - | - |
| Cash & Equivalents | $201.3 million | $129.7 million (Sep 2008) | - | - |
| Total Debt | $570.0 million | $570.0 million (Sep 2008) | - | - |
Note: Total Debt consists of $295.0 million in revolving credit facility borrowings and $275.0 million in Senior Notes.
Material Changes vs. Prior Period
- Revenue Decline: Revenues decreased 18% quarter-over-quarter and 16% year-to-date. This was driven by difficult global economic conditions, reduced new account acquisition by financial institutions, and unfavorable currency translation (primarily the British Pound).
- Segment Performance:
- Scoring Solutions: Revenues dropped 21% due to lower volumes from credit reporting agencies and direct users.
- Professional Services: Revenues dropped 22% as customers slowed contracted services.
- Strategy Machine Solutions: Revenues dropped 15%, though operating income increased 16% due to significant cost reductions.
- Profitability: Despite revenue declines, Net Income increased 32% quarter-over-quarter. This was primarily due to a significant reduction in restructuring charges ($0.9 million vs. $6.1 million in the prior year) and lower share-based compensation expenses.
- Interest Expense: Increased 70% quarter-over-quarter due to the issuance of $275 million in Senior Notes (6.8% weighted average rate) replacing lower-cost Senior Convertible Notes.
- Headcount: Employee count decreased by 25% (from 2,925 to 2,184) as part of the reengineering plan.
Guidance, Outlook, and Risks
- Reengineering Plan: The company is executing a plan to reduce costs and improve profitability. Additional actions announced in January 2009 included eliminating 255 positions, targeting approximately $30 million in annual cost savings.
- Outlook: Management expects the difficult business environment to continue affecting results during fiscal 2009. They anticipate cost of revenues as a percentage of revenues will be slightly higher in upcoming quarters. Research and development and SG&A expenses are expected to remain consistent with current levels as a percentage of revenue.
- Bookings: Bookings for the quarter were $46.8 million, a significant decrease from $99.2 million in the prior year quarter, with no deals exceeding $3.0 million.
- Key Risks:
- Economic Conditions: Continued stress in global financial markets and reduced lending activity by customers.
- Customer Concentration: Reliance on a small number of large customers and the three major credit reporting agencies (Equifax, Experian, TransUnion).
- Goodwill Impairment: If market conditions deteriorate further, the company may be required to record impairment charges related to goodwill.
- Litigation: Ongoing antitrust and unfair competition lawsuit against credit reporting agencies regarding the VantageScore product.
Investor Verification Checklist
- Revenue Quality: Verify the sustainability of the 76% of revenue derived from transactional or unit-based pricing given the decline in credit card usage and new account origination.
- Restructuring Savings: Monitor the realization of the targeted $30 million in annual cost savings from the reengineering plan.
- Goodwill Valuation: Assess the risk of future goodwill impairment charges given the decline in market capitalization and operating results.
- Debt Service: Review the impact of the higher interest rate on the new Senior Notes (6.8%) compared to the retired convertible notes (1.5%).
- Bookings Trend: Track future booking values to determine if the sharp decline in the current quarter is a temporary anomaly or a structural shift in demand.