Fair Isaac Corporation (FICO) — Form 10-Q Summary
Business context and reporting period. FICO provides analytics, decision-management software and credit scoring products and services. This filing covers its fiscal third quarter and nine months ended June 30, 2020; amounts below are in millions unless stated otherwise. The quarter coincided with the COVID-19 pandemic.
Financial performance
| Metric | Quarter ended June 30, 2020 | Prior-year quarter | Nine months ended June 30, 2020 | Prior-year nine months |
|---|---|---|---|---|
| Revenue | $313.7 | $314.2 | $920.2 | $854.7 |
| Operating income | $82.9 | $85.7 | $210.5 | $183.3 |
| Operating margin | 26.4% | 27.3% | 22.9% | 21.4% |
| Net income | $64.1 | $64.2 | $177.3 | $137.5 |
| Diluted EPS | $2.15 | $2.12 | $5.92 | $4.54 |
| Operating cash flow | Not presented separately | Not presented separately | $228.7 | $164.9 |
- Quarter revenue was essentially flat: Scores grew 14% to $131.6, Decision Management Software grew 22% to $40.7, and Applications declined 15% to $141.5. Applications’ decline was mainly tied to a large fraud-solutions license renewal recorded in the prior-year quarter.
- For the nine months, revenue increased 8%; Scores rose 23% and Decision Management Software 17%, while Applications fell 5%. Cloud revenue increased 11% in the quarter and 12% year to date.
- Nine-month net income growth included a substantial benefit from excess tax benefits on stock awards: the effective tax rate was 1.8%, versus 11.4% a year earlier. Quarterly rates were 15.9% and 17.8%, respectively.
- Nine-month cash flow from operations was $228.7; investing used $23.3 and financing used $183.5. Cash increased $19.2 to $125.7.
Balance sheet, debt and capital allocation
- At June 30, cash and cash equivalents were $125.7, current assets $483.0 and current liabilities $460.2. Total liabilities were $1,316.8 and stockholders’ equity $247.3.
- Debt carrying value was approximately $927.0: $188.0 current maturities and $739.0 long-term debt. This included $103.0 drawn on the $400 million revolving credit facility and senior notes. The company reported compliance with debt covenants.
- In July, FICO repaid the $85.0 million final principal amount of its 2010 Senior Notes, using its revolving credit line. The filing does not state the resulting post-repayment debt balance.
- FICO repurchased $54.0 of stock during the quarter and $210.0 during the nine months. In July, the board approved a new open-ended repurchase authorization of up to $250.0 million.
Outlook, commentary and risks
- Management said cash, expected operating cash flows and available revolver borrowings should be sufficient for working and other capital needs, based on current plans and revenue prospects. No specific revenue or earnings guidance was provided.
- COVID-19 affected customer purchasing decisions in Applications and Decision Management Software. Scores saw lower auto and unsecured originations but higher mortgage volume from refinancing. Management could not reliably predict the pandemic’s full effect and said further cost actions may be needed if disruption persists.
- Bookings were $106.2 for the quarter, down from $109.2, and $302.4 for nine months, down from $321.5. Management cautioned that bookings rely on estimates and actual revenue and timing can differ materially. Remaining performance obligations were $247.2; about 54% was expected to be recognized over the next 18 months.
- FICO recorded $3.1 of employee separation costs year to date for eliminating 69 positions; no restructuring expense was recorded in the quarter. It also increased bad-debt expense, citing estimated losses for customers and industries more affected by COVID-19.
- The Department of Justice notified FICO in March that it had opened a civil investigation into potential exclusionary conduct; FICO said it was cooperating. The filing also describes customer disputes, former-employee claims and other ordinary-course legal matters, with no material aggregate exposure identified for matters with a reasonable possibility of loss.
- Other notable risks include dependence on major credit bureaus and banking-related demand, competition, data access and privacy regulation, cybersecurity, and the uncertain economic effects of COVID-19.
Important facts for investors to verify
- Whether Scores growth and cloud adoption can offset weakness in Applications and customer spending.
- How mortgage, auto and unsecured lending volumes—and COVID-related customer purchasing and credit risk—develop.
- Post-July repayment borrowing levels, liquidity, debt maturities and covenant headroom.
- The sustainability of earnings after the unusually low year-to-date tax rate and stock-award tax benefits.
- Developments in the DOJ investigation, customer concentration and the new repurchase authorization.