Fair Isaac Corporation (FICO) — Form 10-Q Summary
Business context and reporting period
Quarter ended December 31, 2013, FICO’s fiscal first quarter. FICO provides analytics, software, data-management products and services, including credit scoring and decision-management solutions. It reports Applications, Scores and Tools segments. All financial amounts below are in U.S. dollars; figures are in millions unless noted.
Financial performance and liquidity
- Revenue: $184.3 million, down 3% from $190.0 million. Transactional and maintenance revenue was $129.7 million, professional services $34.3 million, and license revenue $20.4 million.
- Profit: Operating income was $35.3 million, down 18%; net income was $17.0 million, down 28%. Diluted EPS was $0.47 versus $0.65.
- Margins: Operating margin was 19.1%, down from 22.6%; net margin was 9.2%, down from 12.3%. Cost of revenue was 31% of revenue versus 29%.
- Cash flow: Operating cash flow was $28.4 million, compared with $28.7 million. Capital expenditures were $2.2 million; cash increased $12.8 million to $95.9 million.
- Liquidity and debt: Current assets were $257.7 million and current liabilities $161.6 million. Cash included $71.9 million held offshore. The company had $23.0 million outstanding under its $200 million revolving facility and reported compliance with its covenants. The balance sheet lists $447.0 million of senior notes and $31.0 million of current debt maturities; the notes disclose $455.0 million carrying value for senior notes, so the presentation should be checked against the underlying statements.
- Capital returns: FICO repurchased approximately 438,000 shares for $25.0 million under its repurchase program, with $40.1 million remaining authorized. It paid a $0.02-per-share dividend.
Changes versus the prior-year quarter
- Applications revenue declined 10% to $111.9 million, primarily reflecting lower marketing, fraud and customer-management revenue. The filing attributes the marketing decline in part to the early termination of a large customer in December 2012.
- Scores revenue rose 9% to $47.2 million and segment operating income increased 21% to $36.8 million. Tools revenue rose 15% to $25.2 million, while Tools segment operating income fell 25% to $4.2 million.
- License revenue fell from $27.8 million to $20.4 million; professional-services revenue increased from $32.3 million to $34.3 million.
- Research and development expense rose 24% to $18.1 million, reflecting investment in cloud computing and software as a service (SaaS). SG&A declined 4% to $67.0 million.
- The effective tax rate increased to 37.5% from 33.2%, affected by expiration of the federal R&D credit, a one-time state audit adjustment, an international deferred-tax adjustment and a greater expected revenue mix in higher-tax jurisdictions.
- Bookings were $84.2 million versus $82.0 million, but bookings yield fell to 24% from 33%. Professional services accounted for 55% of bookings versus 34%, while license bookings fell to 16% from 33%. Management cautions that bookings are estimates, not backlog.
Outlook, commentary, risks and unusual items
- Management said cash, available credit and expected operating cash flows should be sufficient for working-capital needs and scheduled debt repayments over the next 12 months; it did not anticipate repatriating offshore earnings in the foreseeable future.
- For the next several quarters, management expected cost of revenue, R&D and SG&A as a percentage of revenue to be consistent with or slightly higher than the reported quarter. It expected interest and intangible-amortization expense to remain broadly consistent with the quarter. No specific revenue or earnings forecast was provided.
- FICO recorded $3.7 million of severance charges after eliminating 83 positions; cash payments were expected by the end of fiscal Q2 2014. Other expense included a nonrecurring charge related to fixed assets.
- Key disclosed risks include dependence on banking and credit-related markets and a limited number of important products, customers and distribution relationships; competition, including from the major credit bureaus; economic and regulatory changes; sales-cycle and bookings-estimation uncertainty; access to data; cybersecurity and service interruptions; and execution of cloud/SaaS expansion and acquisitions.
- The company disclosed customer payment disputes, former-employee claims and other ordinary-course legal matters. It stated that it had no material aggregate exposure for matters with a reasonable possibility of loss. It reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether the sharp Applications decline and lower license revenue persisted, and how the large-customer termination affected subsequent periods.
- Whether bookings translated into recognized revenue, given the lower yield and shift toward professional-services bookings.
- The debt presentation: reconcile the balance-sheet amounts for senior notes and current maturities with the note’s stated senior-note carrying value and revolving-credit borrowing.
- Whether higher R&D investment in cloud/SaaS leads to revenue growth and whether segment margins recover, particularly in Applications and Tools.
- How tax-rate changes, share repurchases and the $71.9 million of offshore cash affect future earnings, liquidity and capital returns.