Fair Isaac Corporation (FICO) — Form 10-Q Summary
Reporting period: Fiscal first quarter ended December 31, 2023; comparisons are primarily with the quarter ended December 31, 2022. FICO operates two segments: Scores and Software.
Financial performance
| Metric | Quarter ended Dec. 31, 2023 | Prior-year quarter | Change |
|---|---|---|---|
| Revenue | $382.1 million | $344.9 million | +11% |
| Operating income | $151.4 million | $140.3 million | +8% |
| Net income | $121.1 million | $97.6 million | +24% |
| Diluted EPS | $4.80 | $3.84 | +25% |
| Operating cash flow | $122.1 million | $92.4 million | +$29.7 million |
- Revenue mix: Scores $192.1 million (+8%); Software $189.9 million (+14%). Software on-premises and SaaS revenue rose 17% to $168.7 million, while professional services revenue declined 5% to $21.3 million.
- Software ARR was $687.7 million at quarter-end, up 18% year over year. Software dollar-based net retention was 114%, versus 120% a year earlier. ACV Bookings were $18.3 million, down from $21.5 million.
- Scores revenue growth was led by business-to-business scoring, primarily from higher unit pricing; consumer scoring revenue declined, primarily due to lower myFICO.com direct sales.
- Operating margin was approximately 39.6%, compared with 40.7% a year earlier; net margin was approximately 31.7%, versus 28.3%. These percentages are calculated from reported figures. Scores segment operating margin was 88%, unchanged; Software segment margin improved to 29% from 27%.
- Cash and cash equivalents were $160.4 million at December 31, versus $136.8 million at September 30, 2023. Operating cash flow less property and equipment purchases was approximately $120.8 million.
- Total debt was $1.962 billion, up from $1.862 billion at September 30; cash less total debt was approximately negative $1.801 billion. Debt included $403 million drawn on a $600 million revolving facility, a $270 million term loan balance, and $1.3 billion of senior notes. Revolver and term loan rates were approximately 6.7%.
- Current maturities of debt were $153 million, including $138 million on the revolving facility. FICO reported compliance with debt covenants. Stockholders’ deficit was $725.8 million.
Changes and notable items
- Revenue growth exceeded operating-income growth as operating expenses increased 13% to $230.7 million. R&D rose 16% and selling, general and administrative expense rose 12%, with increases attributed principally to personnel-related costs and other operating expenses.
- Net income benefited from a lower effective tax rate: 7.3%, versus 17.2% a year earlier. Management attributed the current-quarter rate in part to excess tax benefits related to stock awards.
- Other income was $3.4 million, compared with $0.4 million, primarily reflecting higher investment gains and lower foreign-exchange losses. The prior-year quarter included a $1.9 million gain on a product-line asset sale.
- Financing cash outflow was $99.9 million, including $131.9 million of taxes paid related to net share settlement of equity awards and $71.7 million of common-stock repurchases. FICO had $48.8 million remaining under the repurchase authorization at quarter-end.
- In January 2024, the Board approved a replacement, open-ended stock repurchase program authorizing up to $500 million in repurchases.
Outlook, risks and contingencies
- FICO gave no specific revenue or earnings guidance in the provided filing text. Management said cash, expected operating cash flows and available revolving borrowings should fund working capital and other needs for at least the next 12 months and thereafter for the foreseeable future. It expects $15 million of term-loan principal payments over the next 12 months.
- Revenue concentration is notable: the three major consumer reporting agencies collectively accounted for 39% of revenue, versus 36% in the prior-year quarter. Three agencies each contributed more than 10% of current-quarter revenue.
- FICO cited exposure to interest-rate and foreign-exchange risk; it uses short-term currency forwards to manage certain FX exposures and does not use derivatives for speculation. Variable-rate borrowings expose interest expense and cash flows to rate changes.
- The company reported customer disputes, former-employee claims and other ordinary-course legal matters. It stated that reasonably possible losses were not material individually or in aggregate. No material changes to the risk factors in its fiscal 2023 Form 10-K were reported.
- Management noted that estimates for revenue recognition, taxes, share-based compensation, goodwill and contingencies involve judgment; actual results may differ. Disclosure controls were reported effective, with no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether Software ARR growth and retention remain durable, especially given the quarter-over-quarter and year-over-year DBNRR movement and lower ACV Bookings.
- How much revenue growth depends on pricing and the three consumer reporting agencies, and whether customer concentration changes.
- Debt, variable interest rates, revolving-credit availability and covenant headroom as repurchases and other capital uses continue.
- Drivers and sustainability of the unusually low 7.3% effective tax rate and investment-related other income.
- Execution of the new $500 million repurchase authorization and its effect on cash, debt and share count.