Fair Isaac Corporation (FICO) — Form 10-Q Summary
Business context and reporting period
FICO provides analytics, decision-management software and services, including credit scores, to businesses and consumers. This filing covers the fiscal third quarter and nine months ended June 30, 2012; comparisons are with the corresponding 2011 periods. Amounts below are in U.S. dollars.
Financial performance and position
| Metric | Quarter ended June 30, 2012 | Quarter ended June 30, 2011 | Nine months ended June 30, 2012 | Nine months ended June 30, 2011 |
|---|---|---|---|---|
| Revenue | $160.5 million | $150.7 million | $490.3 million | $459.4 million |
| Operating income | $37.2 million | $37.4 million | $127.4 million | $86.2 million |
| Net income | $20.7 million | $23.2 million | $70.8 million | $46.9 million |
| Diluted EPS | $0.59 | $0.58 | $1.95 | $1.16 |
| Operating margin | 23.2% | 24.8% | 26.0% | 18.8% |
| Net margin | 12.9% | 15.4% | 14.4% | 10.2% |
- Quarterly revenue grew 7%, while operating income was nearly flat and net income fell 11%. Higher operating expenses and a higher tax rate more than offset revenue growth; interest income also fell sharply year over year.
- Nine-month operating income rose 48% and net income rose 51%. The comparison benefited from $12.4 million of restructuring charges in 2011 that did not recur, along with higher revenue and lower research and development expense.
- Quarter revenue by segment: Applications $98.3 million, up 7%; Scores $41.9 million, essentially flat; Tools $20.2 million, up 20%. Nine-month segment revenue increased 7% in Applications, 4% in Scores and 13% in Tools.
- Cash from operations was $106.4 million for the nine months, versus $105.1 million a year earlier. Investing activities provided $35.6 million, principally reflecting net proceeds from marketable securities; financing activities used $157.2 million, including $191.1 million of share repurchases. Cash and equivalents declined $17.1 million to $118.7 million.
- At June 30, cash, cash equivalents and marketable securities totaled $155.7 million. Current assets were $279.4 million and current liabilities $143.7 million. Senior notes totaled $504.0 million, including $8.0 million of current maturities. The company had no revolver borrowings and reported compliance with its debt covenants.
- FICO repurchased 5.19 million shares for $184.3 million in the nine-month period; $0.2 million remained under the November 2011 authorization at June 30. It paid a quarterly dividend of $0.02 per share.
Material changes, outlook and risks
- License revenue increased significantly, including two large multi-year fraud-solutions licenses in the first half. Scores growth included a large, non-recurring project using historical credit bureau scores. Management cautioned that bookings are estimates, not backlog, and may not translate into revenue on the expected timing.
- Bookings were $57.5 million for the quarter, versus $50.0 million a year earlier; bookings yield was 29% versus 24%. The number of bookings above $1 million declined to eight from ten, and weighted-average term declined to 16 months from 19 months.
- FICO acquired Entiera Inc. on May 7, 2012 for $18.3 million in cash, adding customer-dialogue and marketing-automation capabilities. The acquisition added $14.9 million of goodwill, allocated to Applications; its pro forma impact was not material.
- Management expected cost of revenue, research and development, and selling, general and administrative expense as a percentage of revenue over the next several quarters to be consistent with the June 2012 quarter. It expected amortization to be similar to or slightly below that quarter. FICO said available liquidity, operating cash flows and its unused $200 million revolving credit line were expected to cover operating needs and the $49 million principal payment due in May 2013. No specific revenue or EPS guidance is provided in the supplied filing text.
- Management described economic uncertainty, high unemployment and subdued consumer and small-business lending as continuing challenges. Banking and insurance generated about 79% of quarterly revenue. Approximately 37% of quarterly revenue was international, exposing results to currency and regional risks.
- Principal disclosed risks include reliance on major customers and the three credit reporting agencies, economic and financial-sector conditions, competition, execution of the Decision Management strategy, data access and privacy requirements, regulation, cybersecurity, product development and acquisition integration. Litigation includes customer payment disputes and former-employee claims; FICO said it had no material aggregate exposure for matters with a reasonable possibility of loss.
Most important facts for investors to verify
- Whether quarterly earnings pressure persists: revenue rose, but operating income was flat and net income declined.
- How much of revenue growth and segment profitability depended on large, potentially non-recurring license and scoring projects.
- Bookings conversion, given the shorter weighted-average term and management’s warning that bookings estimates can differ from actual revenue.
- Cash generation and liquidity after substantial repurchases, and the capacity to meet the $49 million May 2013 note payment while funding operations and investment.
- Performance and integration of Entiera, and whether growth in Applications and Tools offsets weakness in consumer scores and subdued lending activity.