Business Context and Reporting Period
Company: Fair Isaac Corporation (NYSE: FIC)
Filing Type: Form 10-K (Annual Report)
Period Ended: September 30, 1999
Business Overview: Fair Isaac is a leading developer of data management systems and predictive modeling services, primarily for the financial services industry. The Company pioneered credit risk scoring and provides decision management systems for credit, insurance, direct marketing, healthcare, and telecommunications. In fiscal 1999, the Company operated through five business units: Consumer Credit, Insurance, Direct Marketing (DynaMark), Enterprise-wide Financial Risk Management (RMT), and Healthcare. In October 1999, DynaMark was merged into the parent company, and the Company announced a strategic shift to become a Web-based "analytic application service provider" (ASP).
Key Financial Metrics
| Metric (in thousands, except per share) | Fiscal 1999 | Fiscal 1998 | Fiscal 1997 |
|---|---|---|---|
| Revenues | $276,931 | $245,545 | $199,009 |
| Income from Operations | $46,375 | $40,432 | $37,756 |
| Net Income | $29,980 | $24,327 | $20,686 |
| Diluted Earnings Per Share | $2.09 | $1.68 | $1.46 |
| Operating Margin | 16.7% | 16.5% | 19.0% |
| Net Profit Margin | 10.8% | 9.9% | 10.4% |
| Working Capital | $55,885 | $54,852 | $47,727 |
| Total Assets | $210,353 | $189,614 | $145,228 |
| Stockholders' Equity | $156,499 | $133,451 | $103,189 |
| Cash and Cash Equivalents | $20,715 | $14,242 | $13,209 |
| Long-term Capital Lease Obligations | $364 | $789 | $1,183 |
Material Changes vs. Prior Period
- Revenue Growth: Revenues increased 12.8% to $276.9 million, driven by a 9.2% increase in the Credit segment and a 33% increase in the DynaMark segment. Usage-priced revenues (48% of total) grew 12%, while fixed-price revenues grew only 3%.
- Profitability: Net income rose 23.2% to $29.98 million. Operating income increased 14.7%. The effective tax rate decreased to 40.8% from 42.2% in 1998.
- Expense Trends: Cost of revenues increased 24% (to 38% of revenue), primarily due to the higher proportion of lower-margin DynaMark services. Research and development expenses increased 2% to $29.7 million, though as a percentage of revenue, they declined slightly due to reduced Year 2000 compliance costs.
- One-Time Items: The Company recorded a $720,000 gain from the curtailment of its pension plan and a $483,000 gain from the sale of marketable securities. Conversely, the adoption of SOP 98-9 resulted in the deferral of approximately $4.7 million in software revenue to fiscal 2000.
- Capital Allocation: The Company repurchased 360,004 shares of common stock for approximately $12.2 million during the fiscal year.
Guidance, Outlook, and Risks
- Strategic Shift: Management intends to transition to a Web-based "analytic application service provider" (ASP) model, delivering capabilities via secure Web sites and service bureaus rather than discrete software components.
- Year 2000 Readiness: The Company has completed remediation and testing for its products and internal systems. Total costs incurred were approximately $4.8 million, with total expected costs not exceeding $5 million. Management does not expect significant disruption to operations but notes risks related to third-party dependencies (credit bureaus and processors).
- Backlog: Firm contract backlog decreased to $55.9 million from $68.5 million in the prior year. Approximately 25% of this backlog is expected to be delivered after September 30, 2000. Most usage-based revenues are not included in backlog figures.
- Segment Changes: The Company announced its intent to exit the healthcare receivables management segment to focus on other opportunities. DynaMark was formally merged into the Company in October 1999.
- Market Risks: The Company is exposed to interest rate risk regarding its investment portfolio (approx. $60 million in fixed-income securities) and foreign currency risk, though management deems these not material. Competition is intensifying from data vendors, neural network developers, and in-house customer teams.
Investor Verification Checklist
- Revenue Recognition: Verify the impact of the early adoption of SOP 98-9, which deferred $4.7 million of revenue to the next fiscal year, potentially understating current period performance.
- Margin Dilution: Assess the long-term impact of the growing DynaMark segment (24% of revenue), which carries lower gross margins than the core Credit scoring business.
- Backlog Quality: Confirm the composition of the $55.9 million backlog, noting that it excludes significant usage-based recurring revenue streams.
- Third-Party Dependencies: Evaluate the risk exposure to credit bureaus and card processors regarding Year 2000 readiness, as their failure could materially impact the Company's service delivery.
- Stock Repurchases: Review the remaining authorization under the stock repurchase program (up to 1 million shares authorized; 360,004 purchased to date) and its impact on future liquidity.