Fair Isaac Corporation (FICO) — FY2012 Form 10-K
Reporting period: Fiscal year ended September 30, 2012. The filing also reports the quarter ended September 30, 2012; this is an annual report, not a standalone quarterly filing.
Business context
FICO sells decision-management software, analytics, credit scores and related services through Applications, Scores and Tools. Banking and consumer credit remain central markets. In September 2012, FICO acquired Adeptra, adding cloud-based customer engagement and risk-intervention capabilities; it acquired marketing platform provider Entiera in May 2012.
Financial performance
| Metric | FY2012 | FY2011 | Change |
|---|---|---|---|
| Revenue | $676.4 million | $619.7 million | +9% |
| Operating income | $168.4 million | $127.3 million | +32% |
| Operating margin | 24.9% | 20.5% | +4.4 percentage points |
| Net income | $92.0 million | $71.6 million | +29% |
| Diluted EPS | $2.55 | $1.79 | +42% |
| Operating cash flow | $129.7 million | $136.2 million | −$6.4 million |
Revenue by segment: Applications $424.6 million (+11%), Scores $175.6 million (+4%) and Tools $76.2 million (+12%). Applications growth was led by fraud and customer-management license transactions; Scores benefited from large customer projects and higher transaction volumes; Tools growth included Blaze Advisor and Xpress sales and services. License revenue rose to $85.3 million from $50.3 million, while transactional and maintenance revenue increased to $466.2 million from $453.4 million.
For the September 2012 quarter, revenue was $186.1 million versus $160.2 million a year earlier; net income was $21.2 million versus $24.6 million, and diluted EPS was $0.60 versus $0.64. Quarterly gross profit was $130.7 million, or approximately 70.3% of revenue.
Liquidity, debt and capital allocation
- Cash, cash equivalents and marketable securities totaled $93.6 million at year-end, down from $245.7 million a year earlier. Working capital was $49.7 million, versus $218.0 million.
- Senior Notes totaled $504.0 million in principal, including $49.0 million due in May 2013. The company had no borrowings on its $200 million revolving credit facility and reported compliance with debt covenants.
- Cash from operations was $129.7 million. Investing activities used $65.7 million, including $123.6 million net cash paid for the Adeptra and Entiera acquisitions, offset in part by marketable-security maturities.
- Financing activities used $128.5 million, including $191.1 million of common-stock repurchases in the cash-flow statement. The company paid $0.08 per share in dividends during FY2012 and had $150 million remaining under a new repurchase authorization at year-end.
Changes, outlook and risks
- Growth and margin improvement reflected higher revenue, including large multi-year license deals, and a greater contribution from higher-margin software and Scores products. Operating income also benefited from restructuring and acquisition-related charges falling to $5.1 million from $12.4 million; share-based compensation increased to $21.2 million from $15.5 million.
- Management expected FY2013 to remain challenging, while anticipating growth from modest credit-economy improvement and strategic acquisitions. It expected cost of revenue as a percentage of sales and amortization expense to rise, R&D spending as a share of revenue to be consistent with or slightly above FY2012, and SG&A as a share of revenue and interest expense to be broadly consistent. No numerical revenue or EPS guidance is provided.
- FY2012 included $4.0 million of severance charges for 85 eliminated positions and $1.1 million of acquisition-related costs. A one-time $1.6 million tax charge related to intellectual property rights contributed to an effective tax rate of 32.5%, compared with 26.6% in FY2011.
- Key disclosed risks include reliance on credit-reporting-agency distribution agreements (18% of FY2012 revenue collectively), exposure to banking and insurance markets, economic and regulatory changes affecting data and credit scoring, competition, long and variable sales cycles, acquisition integration and valuation, cybersecurity, and access to customer data. International customers generated 39% of revenue.
- Goodwill was $757.5 million, including $87.3 million added through acquisitions. The company reported no goodwill impairment in FY2012. It disclosed ordinary-course customer and former-employee disputes and stated that reasonably possible losses were not material in aggregate. Deloitte issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- How much of FY2012 revenue and operating-income growth came from nonrecurring large license transactions and special customer projects, and whether those bookings convert to sustained revenue.
- Integration progress, contribution and expected returns from Adeptra and Entiera, including the increase in goodwill and future amortization.
- Liquidity and refinancing plans for the $49 million May 2013 note maturity, alongside continued repurchases and dividends.
- Whether higher acquisition-related costs and lower-margin acquired products affect FY2013 margins as management anticipated.
- Exposure to credit-reporting-agency partners, banking-sector conditions, data/privacy regulation and cybersecurity events.