Fair Isaac Corporation (FICO) — Form 10-Q Summary
Business context and reporting period
FICO provides analytics, decision-management software and services, including consumer and business credit scores. This filing covers the fiscal quarter and six months ended March 31, 2018; comparisons are with the corresponding 2017 periods. Amounts below are in U.S. dollars.
Key financial metrics
| Metric | Quarter ended March 31, 2018 | Year to date |
|---|---|---|
| Revenue | $257.9 million, up 13% | $493.2 million, up 10% |
| Operating income | $48.1 million, up 20%; 18.6% margin | $88.0 million, up 17%; 17.8% margin |
| Net income | $32.3 million, up 29%; 12.5% margin | $59.6 million, down 5%; 12.1% margin |
| Diluted EPS | $1.03, versus $0.78 | $1.90, versus $1.94 |
| Operating cash flow | Not separately provided | $78.0 million, versus $99.4 million |
| Cash and cash equivalents | $107.9 million at March 31, 2018 | $105.6 million at September 30, 2017 |
| Debt | $703.9 million total carrying amount at March 31, 2018 | $604.8 million at September 30, 2017 |
Quarterly revenue mix: transactional and maintenance $195.2 million; professional services $46.1 million; license $16.6 million. Cost of revenues was 30% of revenue in the quarter and 31% year to date; operating margins improved from 17.5% and 16.7%, respectively, in the prior-year periods.
Material changes and management commentary
- Scores led growth: segment revenue rose 34% for the quarter and 26% year to date. Management attributed much of the increase to business-to-business scores, including higher mortgage-related unit pricing; segment operating margins were 81% and 80%, respectively.
- Applications grew: revenue increased 9% for the quarter and 7% year to date, supported by SaaS-related originations, customer communications and collections. Applications operating margin was 27% in both comparative periods.
- Decision Management Software weakened: revenue fell 19% for the quarter and 13% year to date, mainly from lower Blaze Advisor license revenue. Segment operating losses widened to $8.7 million for the quarter and $16.5 million year to date, amid lower higher-margin software sales and continued cloud and product investment.
- Cloud revenue was $63.0 million, or 24% of quarterly revenue, versus $49.8 million, or 22%, a year earlier. Six-month cloud revenue was $119.5 million, also 24% of revenue, versus $99.9 million, or 22%.
- Six-month net income declined despite higher operating income, primarily because of tax expense associated with the Tax Cuts and Jobs Act. FICO recorded provisional charges of $5.6 million for long-term deferred tax assets, $3.0 million for short-term deferred tax assets and $4.9 million for the transition tax; final tax effects remained under review.
- Bookings were $101.7 million for the quarter, up from $91.2 million, but six-month bookings were $183.9 million versus $187.6 million. Management cautions that bookings are estimates and actual revenue and timing may differ.
Liquidity, debt and capital allocation
At March 31, 2018, FICO had $107.9 million in cash, including $94.4 million held offshore, and $460.0 million drawn on its $600 million unsecured revolving credit facility. The revolver’s weighted-average interest rate was 2.973%; FICO reported compliance with its financial covenants. Senior notes had a carrying value of $243.9 million. The balance sheet classified $191.0 million of debt as current, including $131.0 million of senior notes due in May 2018. Management expected cash, operating cash flow and available revolver capacity to meet operating needs and that maturity; it also said it might refinance some debt in 2018.
FICO repurchased approximately 796,000 shares for $124.6 million during the six months and had $162.0 million remaining under its October 2017 repurchase authorization. Six-month cash declined only $2.3 million after operating, investing and financing flows. The decrease in operating cash flow versus the prior year was attributed mainly to timing of ordinary-course receipts and payments.
Outlook, risks and contingencies
- No specific revenue or EPS forecast is provided in the supplied filing text. Management expected cost of revenues, research and development, and selling, general and administrative expenses as a percentage of revenue to remain consistent with the March quarter over the next several quarters; it expected net interest expense to be higher.
- Management’s cloud-first and Decision Management strategy depends on customer adoption, successful product development and execution. The filing identifies risks from competition, long and variable sales cycles, forecast uncertainty, and the possibility of product defects or deployment delays.
- Revenue and profits rely significantly on financial-services customers and distribution relationships with the major credit reporting agencies. The filing also highlights exposure to customer concentration, banking-sector conditions, data access, privacy and security requirements, cyber incidents, regulation, and international markets.
- FICO disclosed customer disputes over amounts owed, former-employee compensation claims and other ordinary-course legal matters. It stated that reasonably possible losses were not material in aggregate; litigation accruals are recorded when losses are probable and estimable.
- The company planned to adopt the new revenue standard in fiscal 2019 using retrospective transition, subject to systems readiness and completion of its analysis. It expected changes primarily for certain on-premises license and guaranteed-minimum-fee revenue timing, contract-balance presentation and commission-cost accounting; the impact was still being assessed.
Important facts for investors to verify
- Whether the May 2018 $131.0 million senior-note maturity was repaid or refinanced, and the resulting debt balance, interest cost and revolver availability.
- Whether mortgage-related score growth and pricing persist, and how dependent growth remains on credit-reporting-agency distribution partners.
- Whether Decision Management Software revenue and operating losses stabilize as FICO invests in cloud infrastructure and new products.
- How the Tax Act provisional estimates are finalized and how they affect the full-year effective tax rate and earnings.
- Whether Topic 606 implementation is completed as planned and what retrospective adjustments it produces; bookings should also be compared with subsequent recognized revenue because bookings are estimates.