Fair Isaac Corporation (FICO) — Form 10-Q summary
Business context and reporting period
FICO provides analytics, software, data-management, and credit-scoring products and services. This filing covers the second quarter and first six months of fiscal 2014, ended March 31, 2014. Comparisons are with the corresponding 2013 periods; amounts below are in millions unless stated otherwise.
Financial performance
| Metric | Q2 FY2014 | Q2 FY2013 | Six months FY2014 | Six months FY2013 |
|---|---|---|---|---|
| Revenue | $185.5 | $179.3 | $369.8 | $369.3 |
| Operating income | $38.7 | $33.2 | $74.0 | $76.2 |
| Operating margin | 20.9% | 18.5% | 20.0% | 20.6% |
| Net income | $20.8 | $18.5 | $37.7 | $41.9 |
| Diluted EPS | $0.59 | $0.51 | $1.06 | $1.15 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $75.1 | $69.0 |
Q2 revenue rose 3%, operating income 17%, and net income 12%. For the six-month period, revenue was essentially flat, operating income declined 3%, and net income declined 10%. The higher year-to-date effective tax rate—35.5% versus 30.6%—weighed on net income; Q2 rates were 33.7% versus 27.1%.
- Q2 revenue mix: transactional and maintenance $132.4; professional services $34.6; license $18.5. Year-to-date license revenue fell to $38.9 from $46.6.
- Q2 segment revenue: Applications $115.6 (down 1%); Scores $47.9 (up 9%); Tools $22.0 (up 22%). For six months, Applications declined 6%, while Scores rose 9% and Tools rose 18%.
- Q2 Scores growth included a royalty underpayment true-up and stronger direct myFICO.com sales. Tools growth was driven largely by license sales. Applications comparisons were affected by large prior-year fraud-software licenses; year-to-date Applications also faced the early termination of a large customer.
- Q2 operating margin improved as cost of revenue and SG&A were lower as a share of revenue. R&D rose 23% in Q2 and 24% year to date, reflecting cloud and SaaS investment. Tools segment margin declined to 5% from 14% in Q2 and to 11% from 23% year to date, as research and development spending increased.
Cash, debt, and liquidity
- Cash and cash equivalents were $108.2 at March 31, 2014, up from $83.2 at September 30, 2013; $76.9 was held offshore. Management said cash, operating cash flows, and credit availability should fund working capital and scheduled debt repayments for the next 12 months.
- Six-month operating cash flow was $75.1. Investing used $4.3, primarily property and equipment purchases; financing used $46.8, including $67.1 of share repurchases. Cash increased by $25.0.
- The balance sheet reports $36.0 of current debt maturities and $447.0 of senior notes. The company separately disclosed $28.0 outstanding on its $200 million revolving facility at 1.285%; it also reported senior-note carrying value of $455.0 in the notes. These disclosed debt figures do not fully reconcile in the supplied filing text and should be checked against the statements and debt note.
- The revolving facility expires September 2016. FICO reported compliance with financial covenants on its revolver and senior notes. It also reported no material off-balance-sheet arrangements.
Changes, outlook, risks, and notable items
- Bookings were $109.1 in Q2, up from $84.8; six-month bookings were $192.0, versus $166.8. Management regards bookings as an indicator, not backlog; estimates of transaction volumes, accounts, and services effort can differ from actual results.
- Management expected cost of revenue, R&D, SG&A, and amortization as percentages of revenue over coming quarters to be consistent with or slightly higher than Q2 levels. It expected interest expense to remain consistent with Q2. The filing provides no specific revenue, earnings, or EPS guidance.
- FICO repurchased 1.19 million shares for $65.0 during the first six months. A new open-ended repurchase program of up to $150.0 was approved in April 2014. The quarterly dividend paid was $0.02 per share; future dividends remain subject to Board discretion.
- On April 1, 2014, FICO acquired InfoCentricity for approximately $8.3 in cash; management did not expect a material pro forma impact. The acquisition is subsequent to the reporting date.
- FICO recorded $3.7 of six-month severance charges for eliminating 83 positions; payments were expected by fiscal year-end. Other expense included a nonrecurring fixed-asset charge, but the filing text does not provide a clear amount.
- Tax-rate increases reflected expiration of the U.S. federal R&D credit, a one-time state audit adjustment, an international deferred-tax adjustment, and a greater expected share of revenue in higher-tax jurisdictions. Unrecognized tax benefits were estimated at $6.4, down from $9.0 at September 2013.
- Key exposures include dependence on banking and consumer-credit customers, major credit-reporting-agency distribution relationships, international operations, data access and privacy regulation, cybersecurity, competition, long sales cycles, and execution of cloud/SaaS and broader Decision Management initiatives. International revenue was 38% of Q2 revenue; banking-related revenue was 74%.
- The company disclosed customer payment disputes, former-employee claims, and other ordinary-course legal matters; it said aggregate exposure for matters with a reasonable possibility of loss was not material. Disclosure controls were assessed as effective, with no material change in internal control reported.
Most important facts for investors to verify
- Reconcile debt disclosures, especially the balance-sheet debt line items, the $28.0 revolver borrowing, and the $455.0 senior-note carrying value in the note.
- Assess whether the Q2 bookings increase converts into recognized revenue, noting bookings are estimates and are not backlog.
- Track Applications recovery and Tools margins against ongoing cloud/SaaS investment, and distinguish recurring performance from prior-year large license comparisons and the Scores royalty true-up.
- Monitor the effective tax rate and the effects of expiring tax credits and audit adjustments on full-year earnings.
- Review subsequent-period impact of the InfoCentricity acquisition and the pace of repurchases under the new $150.0 authorization.