Fair Isaac Corporation (FICO) — FY2013 Form 10-K
Reporting period: Fiscal year ended September 30, 2013. The filing also reports the quarter ended September 30, 2013; this is an annual report, not a standalone quarterly filing. Dollar amounts below are in millions unless noted.
Business context
FICO sells analytics, decision-management software and services, and credit scores. Its three segments are Applications, Scores and Tools. Banking and insurance are core markets; 40% of FY2013 revenue came from international customers. The company completed acquisitions including Adeptra, CR Software and Infoglide during FY2013, following Entiera and Adeptra acquisitions in FY2012.
Financial results and liquidity
| Metric | FY2013 | FY2012 | Change |
|---|---|---|---|
| Revenue | $743.4 | $676.4 | +10% |
| Operating income | $161.6 | $168.4 | -4% |
| Operating margin | 21.7% | 24.9% | Down 3.2 percentage points |
| Net income | $90.1 | $92.0 | -2% |
| Diluted EPS | $2.48 | $2.55 | -3% |
| Cash from operations | $136.1 | $129.7 | +$6.4 |
- Segment revenue: Applications $476.1 (+12%), Scores $180.8 (+3%) and Tools $86.5 (+14%). Applications represented 64% of revenue.
- Revenue mix: transactional and maintenance $514.3; professional services $135.2; licenses $93.9. Transactional or unit-based arrangements were about 69% of revenue.
- Fourth-quarter revenue was $190.3 versus $186.1 a year earlier; net income was $28.6 versus $21.2, and diluted EPS was $0.79 versus $0.60.
- FY2013 cash and cash equivalents were $83.2, including $64.0 held offshore. Working capital was $83.3; total assets were $1,161.5 and equity was $530.7.
- Debt included $455.0 of senior notes and $15.0 outstanding on a $200.0 revolving credit facility. The company reported covenant compliance. Senior-note principal due in FY2014 was $8.0.
- Cash used in investing was $35.0, including $32.9 net cash paid for acquisitions; capital expenditures were $24.1. Cash used in financing was $86.6. The company repurchased approximately 1.7 million shares for $84.9 and paid $0.08 per share in dividends.
Material changes and management commentary
Revenue growth was primarily attributed to recent acquisitions. Operating income fell despite higher revenue, chiefly because acquired offerings had lower margins and operating costs rose: cost of revenues increased to 31% of revenue from 29%, while acquisition-related amortization and share-based compensation also increased. Applications operating margin declined to 27% from 31%; Tools margin fell to 19% from 23%; Scores margin was 71%.
Annual bookings rose to $328.2 from $293.8; bookings yield was 42% versus 43%, and contracts exceeding $1 million numbered 61 versus 54. Management cautioned that bookings rely on estimates of volumes, accounts or service hours and are not equivalent to backlog.
Outlook, risks and unusual items
- For FY2014, management expected cost of revenues as a percentage of revenue and SG&A as a percentage of revenue to be consistent with FY2013; R&D as a percentage of revenue to be consistent or slightly higher; amortization expense to be lower; and interest expense to be consistent or slightly lower. The filing provides no clear revenue or EPS forecast.
- Management said cash, available revolver capacity and anticipated operating cash flow should fund working capital, other needs and scheduled debt repayments for the next 12 months.
- Key risks include dependence on credit-reporting-agency distribution agreements (16% of FY2013 revenue collectively), exposure to banking and insurance markets, competition—including a competing score developed by the three major credit bureaus—data access and privacy constraints, cybersecurity and service interruptions, regulation, long sales cycles, and acquisition integration and execution.
- FY2013 included $3.5 of restructuring and acquisition-related expense. The annual goodwill impairment test found no impairment. The company reported $9.0 of unrecognized tax benefits and said a $7.0 reduction was reasonably possible within 12 months. Customer, former-employee and other ordinary-course disputes were disclosed; FICO said reasonably possible losses were not material in aggregate.
Important facts for investors to verify
- How much of growth and future profitability depends on acquired businesses, and whether their margins improve as integration proceeds.
- Whether bookings convert to revenue as expected, given their estimated and volume-sensitive components.
- Revenue exposure to the three credit bureaus, banking and insurance customers, and international markets; monitor any changes in distribution relationships.
- Debt maturities, covenant headroom, offshore cash availability and the continuing use of cash for repurchases and dividends.
- Potential tax-audit outcomes and the timing and amount of any reduction in uncertain tax benefits.