Fair Isaac Corporation (FICO) — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended June 30, 2013; comparable periods ended June 30, 2012. Unless stated otherwise, amounts below are in U.S. dollars.
Business context
FICO provides analytics, software, data-management solutions and credit scoring products. It reports three segments: Applications, Scores and Tools. Consumer banking remained its largest industry exposure, accounting for 73% of revenue in both the quarter and nine-month period. International revenue was 39% of revenue in both 2013 periods.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Revenue | $183.8 million | $160.5 million | $553.1 million | $490.3 million |
| Operating income | $35.2 million | $37.2 million | $111.4 million | $127.4 million |
| Operating margin | 19.2% | 23.2% | 20.1% | 26.0% |
| Net income | $19.6 million | $20.7 million | $61.5 million | $70.8 million |
| Diluted EPS | $0.54 | $0.59 | $1.69 | $1.95 |
| Operating cash flow | Not separately provided | Not separately provided | $100.2 million | $106.4 million |
- Quarterly revenue rose 15%; nine-month revenue rose 13%. Q3 growth was led by Applications (+17%), Scores (+12%) and Tools (+7%).
- Transactional and maintenance revenue was $129.4 million in Q3, professional services $32.3 million and license revenue $22.0 million.
- Profitability declined despite revenue growth: Q3 operating income fell 5% and net income fell 5%; nine-month operating income fell 13% and net income fell 13%.
- Q3 costs of revenue increased to 32% of revenue from 30%; nine-month costs rose to 31% from 29%. Applications and Tools segment operating margins also declined, while Scores segment income increased.
Financial position and liquidity
- At June 30, 2013, cash and cash equivalents were $93.0 million, versus $71.6 million at September 30, 2012. Current assets were $246.8 million and current liabilities $181.2 million, a current ratio of approximately 1.36.
- The balance sheet reports $38.0 million of current debt maturities and $447.0 million of senior notes. Separately, the debt note reports $455.0 million carrying value for senior notes, and FICO reports $30.0 million outstanding on its revolving facility. Verify the debt classification and reconciliation across these disclosures.
- The revolving credit facility totals $200 million, expires in September 2016, and had $30 million drawn at a 1.375% rate. FICO reported compliance with its financial covenants. Senior-note and revolver covenants include leverage and fixed-charge requirements.
- Nine-month investing cash use was $31.3 million, including $32.9 million net cash paid for acquisitions and $20.4 million for property and equipment. Financing cash use was $43.7 million, including $47.8 million of stock repurchases and $49.0 million of senior-note repayments, partly offset by stock-plan proceeds and $30.0 million in revolver proceeds.
Material changes and notable items
- Applications revenue benefited substantially from the Adeptra and CR Software acquisitions; management attributed lower Applications margins partly to integration of lower-margin acquired products. FICO acquired Infoglide for $4.4 million in cash on April 1, 2013; the acquisition’s pro forma impact was not material.
- Q3 Applications revenue increased $16.7 million, including growth in mobility and fraud solutions, partly offset by lower marketing revenue after a large customer terminated early. Scores revenue increased $5.2 million, with management citing stronger business-to-business volumes and myFICO direct sales. Tools revenue increased $1.4 million, but segment income fell 37% as expenses rose and revenue mix shifted toward lower-margin services and third-party products.
- Amortization expense rose to $3.5 million in Q3 from $1.5 million, and to $10.5 million for nine months from $4.9 million, reflecting acquisition-related intangibles. Nine-month restructuring and acquisition-related expense was $3.5 million; Q3 expense was $0.2 million.
- Bookings were $70.2 million in Q3 versus $57.5 million, and $236.9 million for nine months versus $195.2 million. The company cautions that bookings rely on estimates and should not be treated as backlog.
- FICO repurchased 985,606 shares for $47.8 million during the nine months, with $102.2 million remaining under its $150 million authorization. It paid a quarterly dividend of $0.02 per share.
Outlook, risks and contingencies
- Management stated that cash, available revolver borrowings and anticipated operating cash flows should cover working capital, other capital needs and scheduled debt repayments over the next 12 months. It expected cost of revenue, R&D and SG&A as percentages of revenue to be consistent with or slightly below Q3 levels; amortization and interest expense were expected to be slightly lower.
- The filing provides no specific revenue, earnings or EPS forecast. Management’s outlook is subject to risks, including variable sales cycles and transaction volumes, economic and banking-industry conditions, customer and credit-bureau concentration, competition, regulation, data access, cybersecurity, and acquisition integration and impairment risks.
- FICO reported customer payment disputes, former-employee claims and other ordinary-course legal matters. It stated that reasonably possible legal losses were not material in aggregate. Unrecognized tax benefits were estimated at $8.8 million, with $0.9 million accrued for related interest.
- Foreign-currency translation reduced comprehensive income by $15.7 million over nine months. The company uses short-term forward contracts to manage currency exposure and does not use derivatives for speculation.
Important facts for investors to verify
- Reconcile the balance-sheet debt components with the note’s $455 million senior-note carrying value and the $30 million revolver borrowing; review maturities and covenant headroom.
- Assess whether revenue growth from acquisitions can be sustained while containing integration costs and restoring Applications and Tools margins.
- Monitor the drivers of weaker operating income and cash flow, including expense growth, deferred-revenue timing and acquisition-related amortization.
- Evaluate reliance on consumer banking, transactional volumes and the three major credit bureaus; these agencies collectively represented about 17% of Q3 revenue.
- Review the assumptions and uncertainty in bookings, management’s cost outlook, tax exposures and legal contingencies.