Fair Isaac Corporation (FICO) — Form 10-Q Summary
Reporting period: Fiscal first quarter ended December 31, 2022; comparisons are with the quarter ended December 31, 2021 unless otherwise noted. Amounts are in U.S. dollars.
Business context
FICO provides analytics software and scoring services through its Scores and Software segments. Its customers include financial institutions, consumer reporting agencies, and businesses in other industries. Software is sold on-premises and as SaaS; Scores includes business-to-business and consumer offerings.
Financial performance
| Metric | Q1 FY2023 | Prior-year quarter | Change |
|---|---|---|---|
| Revenue | $344.9 million | $322.4 million | +7% |
| Operating income | $140.3 million | $115.6 million | +21% |
| Net income | $97.6 million | $85.0 million | +15% |
| Diluted EPS | $3.84 | $3.09 | +24% |
| Operating cash flow | $92.4 million | $124.9 million | Down $32.4 million |
- Operating margin was approximately 40.7%, up from 35.9%; net margin was approximately 28.3%, up from 26.4%.
- Scores: Revenue increased 5% to $178.0 million. B2B Scores revenue rose $11.9 million, partly offset by a $3.4 million decline in consumer revenue. Management cited a multi-year license renewal, higher unit prices, and increased unsecured credit originations; mortgage originations also declined.
- Software: Revenue increased 9% to $166.9 million. On-premises and SaaS revenue grew 14% to $144.6 million, while professional services revenue fell 16% to $22.3 million. Segment operating margin rose to 27% from 23%, which management attributed to more higher-margin license revenue and fewer lower-margin services.
- Software annual recurring revenue was $582.9 million, up 11% year over year. Dollar-based net retention was 110%. Software ACV Bookings were $21.5 million versus $16.4 million.
- Operating expenses totaled $204.5 million, down 1%. Cost of revenue increased 11%; R&D decreased 6%, and SG&A decreased 5%. Interest expense, net, rose 87% to $22.8 million, primarily due to higher average debt and borrowing rates.
Cash, debt, and liquidity
- Cash and cash equivalents were $139.9 million at December 31, 2022, including $117.0 million held by foreign subsidiaries. Cash increased $6.7 million from September 30, 2022.
- Operating cash flow was $92.4 million. Investing activities used $10.6 million and financing activities used $79.6 million. Management attributed the operating cash flow decline mainly to timing of receipts and payments and lower non-cash items.
- Total debt was reported as approximately $1.9 billion. Debt included $350 million drawn on a $600 million revolving facility, a $285 million term loan, and $1.3 billion face value of senior notes. The revolver and term loan carried rates of 5.817% and 6.051%, respectively, at quarter-end.
- FICO reported compliance with its debt covenants. It had $100 million of current debt maturities on the balance sheet and said $15 million of term-loan principal payments were due over the next 12 months.
- Management said cash, available revolver capacity, and expected operating cash flows should fund working and other capital needs for at least the next 12 months and thereafter for the foreseeable future.
- FICO repurchased $75.0 million of stock during the quarter; $451.1 million remained under its $500 million open-ended repurchase authorization at December 31, 2022. Weighted-average diluted shares fell to 25.4 million from 27.5 million.
Changes, outlook, and risks
- A $1.9 million gain reflected the sale of certain assets related to the Siron compliance business. The company’s reported ACV Bookings and ARR exclude the Siron product line; the filing also excludes the previously divested Collections and Recovery business from those metrics.
- FICO amended its credit agreement in November 2022 to replace LIBOR with SOFR as the reference rate. Variable-rate borrowings expose the company to higher interest expense if rates rise.
- Management expects cash tax payments and related deferred tax asset positions to increase significantly in fiscal 2023, following the tax requirement to capitalize research and experimental expenditures. The company said this was not expected to materially affect its fiscal 2023 effective tax rate.
- Three consumer reporting agencies collectively generated 36% of quarterly revenue; two each accounted for more than 10%. This customer concentration is an important exposure.
- The filing describes disputes with customers over amounts owed, former-employee claims, and other ordinary-course legal matters. FICO said it had no material aggregate exposure for matters with a reasonable possibility of loss.
- No specific full-year financial guidance was provided in the supplied filing text. FICO reported no material changes to the risk factors in its prior Form 10-K and said its disclosure controls were effective.
Important facts for investors to verify
- Whether software ARR growth, platform growth, ACV Bookings, and 110% net retention continue in subsequent quarters.
- How much revenue and profitability depend on the three major consumer reporting agencies, and how credit-market conditions affect scores volumes, especially mortgage originations.
- Whether lower operating cash flow reflects temporary working-capital timing or a continuing trend, and whether higher cash taxes affect liquidity as anticipated.
- Debt levels, variable borrowing costs, covenant headroom, upcoming maturities, and the pace of share repurchases.
- The ongoing effects of the Siron asset sale and the company’s shift toward software and away from professional services.