Fair Isaac Corporation (FICO) — Form 10-Q Summary
Business context and reporting period
Fiscal first quarter ended December 31, 2011; comparisons are with the quarter ended December 31, 2010. FICO provides analytics, software, data management and credit scoring products. Its reportable segments are Applications, Scores and Tools. Banking and insurance represented approximately 80% of quarterly revenue, and international revenue was $72.3 million, or 42% of revenue.
Financial results and liquidity
| Metric | Q1 FY2012 | Q1 FY2011 |
|---|---|---|
| Revenue | $170.3 million | $155.9 million |
| Operating income / margin | $52.1 million / 30.6% | $29.6 million / 19.0% |
| Income before taxes | $43.6 million | $21.4 million |
| Net income | $30.0 million | $16.0 million |
| Diluted EPS | $0.81 | $0.40 |
| Cash from operating activities | $41.1 million | $32.9 million |
Revenue grew 9%; net income rose 87%. License revenue increased to $27.5 million from $13.3 million, primarily reflecting two large multi-year fraud-solutions licenses recognized in the quarter. Transactional and maintenance revenue was nearly flat at $114.2 million; professional services revenue rose to $28.7 million. Applications revenue grew 13% to $110.2 million, Scores grew 4% to $42.5 million, and Tools was essentially flat at $17.6 million.
Operating expenses fell 6% to $118.3 million. R&D declined 28% to $13.0 million and SG&A declined 4% to $57.3 million; there were no restructuring charges, versus $0.9 million in the prior-year quarter. The effective tax rate increased to 31.2% from 25.3%, which FICO attributed to expiration of the federal R&D tax credit after its prior-year extension. Cash and cash equivalents were $175.4 million at quarter-end; current and long-term marketable securities totaled a further $60.6 million. Current liabilities were $139.8 million.
Senior notes totaled $512 million in principal, including $8 million of current maturities; the filing reports a $504 million noncurrent balance-sheet amount. The $200 million revolving credit facility had no borrowings outstanding, and FICO reported compliance with its financial covenants. Operating cash flow improved year over year. Investing activities provided $41.7 million, principally reflecting net securities maturities; financing activities used $41.7 million, including $57.7 million of cash spent on repurchases. FICO repurchased 1.89 million shares for $50.9 million under its programs and had $133.6 million remaining under the new authorization. It paid a $0.02-per-share quarterly dividend.
Material changes, outlook and risks
- Bookings were $59.2 million versus $84.0 million a year earlier; bookings yield was 21% versus 20%, and weighted-average term was 22 months versus 42 months. Transactional and maintenance bookings fell to 33% of total bookings from 60%, while professional services and license bookings increased as shares of total.
- Management said consumer and small-business lending had stabilized in many markets but was not showing strong growth, and expected consumer lending growth to lag the broader economic recovery. FICO continued its cost and resource-allocation reengineering initiative.
- For the next several quarters, management expected cost of revenue, R&D and SG&A as percentages of revenue to be consistent with or slightly higher than Q1 levels; amortization was expected to be slightly lower, and interest expense broadly consistent. The filing provides no specific revenue or EPS forecast.
- FICO stated that cash, securities, available credit and expected operating cash flows should fund working capital, capital needs and scheduled debt repayments over the next 12 months; no significant debt maturities were expected before May 2013.
- Principal risks include dependence on banking, insurance and a limited number of large customers and credit-bureau distribution partners; economic and lending conditions; competitive pressure, including competition from the major credit bureaus; execution of the Decision Management strategy; data access, privacy, cybersecurity and regulatory requirements; international and currency exposure; and goodwill impairment risk. FICO disclosed ordinary-course customer and former-employee disputes and other claims, but said it did not expect them to materially adversely affect results, liquidity or financial condition; potential losses could not be reliably quantified.
Most important facts for investors to verify
- Whether Q1 profit growth is repeatable: reported results benefited materially from two large license transactions, while bookings declined substantially.
- Bookings assumptions and conversion timing, given reliance on estimated transaction volumes, active accounts and service hours.
- Cash availability and debt disclosures: reconcile the $512 million note principal with the $504 million noncurrent balance-sheet figure and current maturities.
- Repurchase pace, remaining authorization and the effect of buybacks on share count, liquidity and leverage.
- Exposure to economic conditions, key customers and distributors, data/privacy regulation, and the substantial goodwill balance.