Fair Isaac Corporation (FICO) — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended June 30, 2017; comparisons are with the corresponding 2016 periods. FICO provides analytics, software, data-management solutions and credit scores.
Financial performance
| Metric | Quarter | Nine months |
|---|---|---|
| Revenue | $231.0 million, down 3% | $679.0 million, up 5% |
| Operating income | $41.4 million, down 25% | $116.4 million, down 7% |
| Net income | $25.2 million, down 28% | $88.2 million, up 14% |
| Diluted EPS | $0.78, versus $1.08 | $2.73, versus $2.39 |
| Operating cash flow | Not provided separately | $171.4 million, versus $177.7 million |
- Quarterly operating margin was approximately 17.9%, versus 23.2% a year earlier; nine-month operating margin was approximately 17.1%, versus 19.3%. Quarterly net margin was approximately 10.9%, versus 14.6%; nine-month net margin was approximately 13.0%, versus 12.0%.
- Quarterly revenue reflected Scores growth of 14%, offset by declines in Applications (5%) and Decision Management Software (23%). Nine-month revenue rose in Applications (5%) and Scores (9%), while Decision Management Software fell 2%.
- Quarterly license revenue fell to $20.4 million from $40.6 million, partly reflecting large prior-year license transactions. Transactional and maintenance revenue increased to $166.7 million from $153.9 million.
- Nine-month net income benefited from $23.5 million of excess tax benefits on stock awards recorded as a reduction of income tax expense following adoption of a new accounting standard. The nine-month effective tax rate was 9.2%, compared with 27.2%.
Financial position and capital allocation
- At June 30, 2017, cash and cash equivalents were $130.7 million, including $118.1 million held offshore; current assets were $322.0 million and current liabilities were $399.0 million.
- Total debt was approximately $611.8 million: $224.0 million current maturities and $387.8 million long-term debt. This included $296.0 million drawn on the revolving facility and $315.8 million carrying value of senior notes.
- The revolving credit capacity was increased to $500 million, with an option for an additional $100 million, and expires December 30, 2019. FICO reported compliance with financial covenants. The company cited cash, operating cash flows and available credit as sufficient for capital needs and scheduled principal payments of $72 million in July 2017 and $131 million in May 2018.
- Nine-month investing cash use was $15.6 million; financing cash use was $102.8 million, including $116.3 million of share repurchases and $1.2 million of dividends. The Board discontinued cash dividends in May 2017 in favor of share repurchases. $109.5 million remained under the repurchase authorization at quarter-end.
Management commentary, outlook and risks
- Management attributed Scores growth to increased business-to-business scoring activity and consumer score royalties. It cited lower higher-margin software license sales and investment in sales distribution, product delivery, support and cloud infrastructure as pressures on Applications and Decision Management Software results.
- Bookings were $95.5 million for the quarter, versus $78.8 million; nine-month bookings were $283.0 million, versus $297.7 million. Management reported quarter-over-quarter bookings growth of 26% in Applications and 2% in Decision Management Software. Bookings are estimates of contract value, and actual revenue and timing may differ.
- For the next several quarters, management expected cost of revenues, research and development, and selling, general and administrative expenses as percentages of revenue to remain broadly consistent with the June quarter. It expected lower amortization and net interest expense than in that quarter. No specific revenue or earnings guidance was provided in the supplied filing text.
- The company recorded $4.5 million of restructuring charges: $1.7 million for vacated San Rafael facilities and $2.8 million for elimination of 79 positions. Employee separation payments were expected by fiscal year-end; facility payments extend through fiscal 2020.
- Key disclosed risks include reliance on major credit-reporting-agency distribution relationships and banking customers; competition, including a rival scoring product developed by the three major agencies; economic and regulatory changes; data access, cybersecurity and system interruptions; and execution risks in new products, cloud offerings and the Decision Management strategy.
- FICO disclosed customer payment disputes, former-employee claims and other ordinary-course legal matters; it stated that it did not consider aggregate exposure for matters with a reasonable possibility of loss to be material. The company reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether Scores growth can continue and whether Applications and Decision Management Software revenue and margins recover as license sales and investment levels change.
- How much of nine-month earnings growth reflects recurring operations versus the $23.5 million stock-award tax benefit, and how future tax rates may vary.
- Debt repayment and refinancing plans, revolver utilization, covenant headroom and liquidity after the scheduled July 2017 and May 2018 note payments.
- Concentration and renewal terms for relationships with Equifax, TransUnion and Experian, which collectively represented about 21% of quarterly revenue and 20% of nine-month revenue in 2017.
- Actual conversion of bookings into revenue, given management’s warning that bookings estimates and timing can differ from realized results.