FAIR ISAAC CORPORATION FORWARD-LOOKING STATEMENTS
Statements contained in this report that are not statements of historical fact should be considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (the "PSLRA"). In addition, certain statements in our future filings with theSecurities and Exchange Commission ("SEC"), in press releases, and in oral and written statements made by us or with our approval that are not statements of historical fact constitute forward-looking statements within the meaning of the PSLRA. Examples of forward-looking statements include, but are not limited to: (i) projections of revenue, income or loss, expenses, earnings or loss per share, the payment or nonpayment of dividends, share repurchases, capital structure and other statements concerning future financial performance; (ii) statements of our plans and objectives by our management or Board of Directors, including those relating to products or services, research and development, and the sufficiency of capital resources; (iii) statements of assumptions underlying such statements, including those related to economic conditions; (iv) statements regarding results of business combinations or strategic divestitures; (v) statements regarding business relationships with vendors, customers or collaborators, including the proportion of revenues generated from international as opposed to domestic customers; and (vi) statements regarding products and services, their characteristics, performance, sales potential or effect in use by customers. Words such as "believes," "anticipates," "expects," "intends," "targeted," "should," "potential," "goals," "strategy," "outlook," "plan," "estimated," "will," variations of these terms and similar expressions are intended to identify forward-looking statements, but are not the exclusive means of identifying such statements. Forward-looking statements involve risks and uncertainties that may cause actual results to differ materially from those in such statements. Factors that could cause actual results to differ from those discussed in the forward-looking statements include, but are not limited to, those described in Part I, Item 1A "Risk Factors" of our Annual Report on Form 10-K for the fiscal year endedSeptember 30, 2022 and in subsequent filings with theSEC . The performance of our business and our securities may be adversely affected by these factors and by other factors common to other businesses and investments, or to the general economy. Forward-looking statements are qualified by some or all of these risk factors. Therefore, you should consider these risk factors with caution and form your own critical and independent conclusions about the likely effect of these risk factors on our future performance. Such forward-looking statements speak only as of the date on which statements are made, and we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made to reflect the occurrence of unanticipated events or circumstances. Readers should carefully review the disclosures and the risk factors described in this and other documents we file from time to time with theSEC , including our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K. OVERVIEW We were founded in 1956 on the premise that data, used intelligently, can improve business decisions. Today, FICO's software and the widely used FICO® Score operationalize analytics, enabling thousands of businesses in nearly 120 countries to uncover new opportunities, make timely decisions that matter, and execute them at scale. Most leading banks and credit card issuers rely on our solutions, as do insurers, retailers, telecommunications providers, automotive lenders, consumer reporting agencies, public agencies, and organizations in other industries. We also serve consumers through online services that enable people to access and understand their FICO® Scores - the standard measure in theU.S. of consumer credit risk - empowering them to increase financial literacy and manage their financial health.
Our business consists of two operating segments: Scores and Software.
Our Scores segment includes our business-to-business ("B2B") scoring solutions
and services which give our clients access to predictive credit and other scores
that can be easily integrated into their transaction streams and decision-making
processes. This segment also includes our business-to-consumer ("B2C") scoring
solutions, including our myFICO.com subscription offerings.
Our Software segment includes pre-configured analytic and decision management
solutions designed for a specific type of business need or process - such as
account origination, customer management, customer engagement, fraud detection,
and marketing - as well as associated professional services. This segment also
includes FICO® Platform, a modular software offering designed to support
advanced analytic and decision use cases, as well as stand-alone analytic and
decisioning software that can be configured by our customers to address a wide
variety of business use cases. Our offerings are available to our customers as
software-as-a-service ("SaaS") or as on-premises software.
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Highlights from the quarter ended
•Total revenue for our Scores segment was
•Annual Recurring Revenue for our Software segment as of
•Dollar-Based Net Retention Rate for our Software segment was 110% during the
quarter ended
•Operating income was
•Net income was
•Diluted EPS was
•Cash flows from operations were$92.4 million during the quarter endedDecember 31, 2022 , compared with$124.9 million during the quarter endedDecember 31, 2021 .
•Cash and cash equivalents were
•Total debt balance was
•Total share repurchases during the quarter ended
Key performance metrics for Software segment
Annual Contract Value Bookings ("ACV Bookings")
Management regards ACV Bookings as an important indicator of future revenues, but they are not comparable to, nor are they a substitute for, an analysis of our revenues and otherU.S. generally accepted accounting principles ("U.S. GAAP") measures. We define ACV Bookings as the average annualized value of software contracts signed in the current reporting period that generate current and future on-premises and SaaS software revenue. We only include contracts with an initial term of at least 24 months and we exclude perpetual licenses and other software revenues that are non-recurring in nature. For renewals of existing software subscription contracts, we count only incremental annual revenue expected over the current contract as ACV Bookings. ACV Bookings is calculated by dividing the total expected contract value by the contract term in years. The expected contract value equals the fixed amount - including guaranteed minimums, if any - stated in the contract, plus estimates of future usage-based fees. We develop estimates from discussions with our customers and examinations of historical data from similar products and customer arrangements. Differences between estimates and actual results occur due to variability in the estimated usage. This variability can be the result of the economic trends in our customers' industries; individual performance of our customers relative to their competitors; and regulatory and other factors that affect the business environment in which our customers operate. We disclose estimated revenue expected to be recognized in the future related to remaining performance obligations in Note 8 to the accompanying condensed consolidated financial statements. However, we believe ACV Bookings is a more meaningful measure of our business as it includes estimated revenues and future billings excluded from Note 8, such as usage-based fees and guaranteed minimums derived from our on-premises software licenses, among others. The following table summarizes our ACV Bookings during the periods indicated: Quarter Ended December 31, 2022 2021 (In millions) Total on-premises and SaaS software (*) $ 21.5$ 16.4 (*) During the quarter endedDecember 31, 2022 , we sold certain assets related to our Siron compliance business. The amounts above exclude this product line for all periods presented. 18
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Annual Recurring Revenue ("ARR")
Accounting Standards Codification Topic 606, Revenue from Contacts with Customers, requires us to recognize a significant portion of revenue from our on-premises software subscriptions at the point in time when the software is first made available to the customer, or at the beginning of the subscription term, despite the fact that our contracts typically call for billing these amounts ratably over the life of the subscription. The remaining portion of our on-premises software subscription revenue including maintenance and usage-based fees are recognized over the life of the contract. This point-in-time recognition of a portion of our on-premises software subscription revenue creates significant variability in the revenue recognized period to period based on the timing of the subscription start date and the subscription term. Furthermore, this point-in-time revenue recognition can create a significant difference between the timing of our revenue recognition and the actual customer billing under the contract. We use ARR to measure the underlying performance of our subscription-based contracts and mitigate the impact of this variability. ARR is defined as the annualized revenue run-rate of on-premises and SaaS software agreements within a quarterly reporting period, and as such, is different from the timing and amount of revenue recognized. All components of our software licensing and subscription arrangements that are not expected to recur (primarily perpetual licenses) are excluded. We calculate ARR as the quarterly recurring revenue run-rate multiplied by four.
The following table summarizes our ARR for on-premises and SaaS software at each of the dates presented:
March 31, 2021 June 30, September
30, 2021
2021 2022
ARR (*) (In millions)
Platform (**) $ 58.2 $ 66.0 $ 73.6 $ 90.9 $ 95.4 $ 107.2 $ 113.1 $ 132.8
Non-platform 418.5 425.6 427.7 433.4 430.6 432.3 437.0 450.1
Total $ 476.7 $ 491.6 $ 501.3 $ 524.3 $ 526.0 $ 539.5 $ 550.1 $ 582.9
Percentage
Platform 12 % 13 % 15 % 17 % 18 % 20 % 21 % 23 %
Non-platform 88 % 87 % 85 % 83 % 82 % 80 % 79 % 77 %
Total 100 % 100 % 100 % 100 % 100 % 100 % 100 % 100 %
YoY Change
Platform 48 % 58 % 61 % 71 % 64 % 62 % 54 % 46 %
Non-platform (4) % 1 % - % 3 % 3 % 2 % 2 % 4 %
Total - % 6 % 6 % 11 % 10 % 10 % 10 % 11 %
(*) During the quarter ended December 31, 2022 , we sold certain assets related
to our Siron compliance business, and during fiscal 2021, we divested our
Collections and Recovery ("C&R") business. The amounts and percentages above
exclude this product line and business at all dates presented.
(**) The FICO platform software is a set of interoperable capabilities which use
software assets owned and/or governed by FICO for building solutions and
services which conform to FICO architectural standards based on key elements of
Cloud Native Computing design principles. These standards encompass shared
security context and access using FICO standard application programming
interfaces.
Dollar-Based Net Retention Rate ("DBNRR")
We consider DBNRR to be an important measure of our success in retaining and
growing revenue from our existing customers. To calculate DBNRR for any period,
we compare the ARR at the end of the prior comparable quarter ("base ARR") to
the ARR from that same cohort of customers at the end of the current quarter
("retained ARR"); we then divide the retained ARR by the base ARR to arrive at
the DBNRR. Our calculation includes the positive impact among this cohort of
customers of selling additional products, price increases and increases in
usage-based fees, and the negative impact of customer attrition, price
decreases, and decreases in usage-based fees during the period. However, the
calculation does not include the positive impact from sales to any new customers
acquired during the period. Our DBNRR may increase or decrease from period to
period as a result of various factors, including the timing of new sales and
customer renewal rates.
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The following table summarizes our DBNRR for on-premises and SaaS software for each of the periods presented:
Quarter Ended
March 31, 2021 June 30, September 30, December 31, March 31, June 30, September 30, December 31,
2021 2021 2021 2022 2022 2022 2022
DBNRR (*)
Platform 134 % 142 % 146 % 146 % 144 % 137 % 129 % 130 %
Non-platform 95 % 100 % 100 % 102 % 102 % 101 % 101 % 103 %
Total 99 % 104 % 105 % 109 % 109 % 109 % 109 % 110 %
(*) During the quarter ended December 31, 2022 , we sold certain assets related
to our Siron compliance business, and during fiscal 2021, we divested our C&R
business. The percentages above exclude this product line and business for all
periods presented.
RESULTS OF OPERATIONS
We are organized into two reportable segments: Scores and Software. Although we
sell solutions and services into a large number of end user product and industry
markets, our reportable business segments reflect the primary method in which
management organizes and evaluates internal financial information to make
operating decisions and assess performance.
Segment revenues, operating income, and related financial information, including disaggregation of revenue, are set forth in Note 8 and Note 12 to the accompanying condensed consolidated financial statements.
Revenues
The following tables set forth certain summary information on a segment basis
related to our revenues for the quarters ended
Quarter Ended December 31, Percentage of Revenues Period-to-Period Period-to-Period
Segment 2022 2021 2022 2021 Change Percentage Change
(In thousands) (In thousands)
Scores $ 177,988 $ 169,487 52 % 53 % $ 8,501 5 %
Software 166,882 152,874 48 % 47 % 14,008 9 %
Total $ 344,870 $ 322,361 100 % 100 % 22,509 7 %
Scores
Scores segment revenues increased $8.5 million due to an increase of $11.9
million in our business-to-business scores revenue, partially offset by a
decrease of $3.4 million in our business-to-consumer revenue. The increase in
business-to-business scores revenue was primarily attributable to a multi-year
license renewal, higher unit prices across several business-to-business
offerings and an increase in unsecured credit originations volume, partially
offset by a decrease in mortgage originations volume during the quarter ended
December 31, 2022 . The decrease in business-to-consumer revenue was primarily
attributable to a decrease in direct sales generated from the myFICO.com
website.
Software
Quarter Ended December 31, Period-to-Period Period-to-Period
2022 2021 Change Percentage Change
(In thousands) (In thousands)
On-premises and SaaS software $ 144,560 $ 126,338 $ 18,222 14 %
Professional services 22,322 26,536 (4,214) (16) %
Total $ 166,882 $ 152,874 14,008 9 %
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Software segment revenues increased$14.0 million due to an$18.2 million increase in our on-premises and SaaS software revenue, partially offset by a$4.2 million decrease in services revenue. The increase in our on-premises and SaaS software revenue was attributable to a$9.4 million increase in our non-platform software revenue and an$8.8 million increase in our platform software revenue. The decrease in services revenue was primarily attributable to our strategic shift to emphasize software over services.
Operating Expenses and Other Income, Net
The following tables set forth certain summary information related to our
condensed consolidated statements of income and comprehensive income for the
quarters ended
Quarter Ended December 31, Percentage of Revenues Period-to-
Period-to-Period Period
2022 2021 2022 2021 Change Percentage Change
(In thousands, except (In thousands,
employees) except employees)
Revenues $ 344,870 $ 322,361 100 % 100 % $ 22,509 7 %
Operating expenses:
Cost of revenues 76,569 69,203 22 % 21 % 7,366 11 %
Research and development 36,633 38,980 11 % 12 % (2,347) (6) %
Selling, general and
administrative 92,995 98,048 27 % 31 % (5,053) (5) %
Amortization of intangible assets 275 544 - % - % (269) (49) %
Gain on product line asset sale (1,941) - (1) % - % (1,941) - %
Total operating expenses 204,531 206,775 59 % 64 % (2,244) (1) %
Operating income 140,339 115,586 41 % 36 % 24,753 21 %
Interest expense, net (22,800) (12,195) (7) % (4) % (10,605) 87 %
Other income, net 364 1,429 - % - % (1,065) (75) %
Income before income taxes 117,903 104,820 34 % 32 % 13,083 12 %
Provision for income taxes 20,260 19,861 6 % 6 % 399 2 %
Net income $ 97,643 $ 84,959 28 % 26 % 12,684 15 %
Number of employees at quarter end 3,305 3,516 (211) (6) %
Cost of Revenues
Cost of revenues consists primarily of employee salaries, incentives, and benefits for personnel directly involved in delivering software products, operating SaaS infrastructure, and providing support, implementation and consulting services; overhead, facilities and data center costs; software royalty fees; credit bureau data and processing services; third-party hosting fees related to our SaaS services; travel costs; and outside services.
The quarter-over-prior year quarter increase in cost of revenues of$7.4 million was primarily attributable to a$9.2 million increase in personnel and labor costs and a$0.5 million increase in travel costs, partially offset by a$2.2 million decrease in direct materials costs. The increase in personnel and labor costs was primarily attributable to increases in employee time allocated to cost of revenues and headcount. The increase in travel costs was primarily attributable to relaxed COVID-19 related restrictions. The decrease in direct materials costs was primarily attributable to a decrease in telecommunications costs to support FICO® Customer Communications Services revenue and a decrease in credit bureau data costs associated with decreased business-to-consumer scoring solutions revenue through the myFICO.com website. Cost of revenues as a percentage of revenues increased to 22% during the quarter endedDecember 31, 2022 from 21% during the quarter endedDecember 31, 2021 , primarily due to an increase in personnel and labor costs. 21
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Research and Development
Research and development expenses include personnel and related overhead costs incurred in the development of new products and services, including research of mathematical and statistical models and development of new versions of Software products. The quarter-over-prior year quarter decrease in research and development expenses of$2.3 million was primarily attributable to a$2.8 million decrease in personnel and labor costs as a result of decreased headcount, partially offset by a$0.5 million increase in software royalty fees. Research and development expenses as a percentage of revenues decreased to 11% during the quarter endedDecember 31, 2022 from 12% during the quarter endedDecember 31, 2021 .
Selling, General and Administrative
Selling, general and administrative expenses consist principally of employee salaries, incentives, commissions and benefits; travel costs; overhead costs; advertising and other promotional expenses; corporate facilities expenses; legal expenses; and business development expenses. The quarter-over-prior year quarter decrease in selling, general and administrative expenses of$5.1 million was primarily attributable to a$5.5 million decrease in personnel and labor costs and a$2.6 million decrease in facilities and infrastructure costs, partially offset by a$1.5 million increase in travel costs and a$1.1 million increase in marketing costs. The decrease in personnel and labor costs was primarily a result of decreases in employee time allocated to these expenses and headcount. The decrease in facilities and infrastructure costs was primarily attributable to a favorable adjustment from the termination of an office lease related to our consolidation of office space. The increases in travel and marketing costs were primarily driven by increased advertising costs and increased travel for marketing and communication events as certain COVID-19 related restrictions have been relaxed. Selling, general and administrative expenses as a percentage of revenues decreased to 27% during the quarter endedDecember 31, 2022 from 31% during the quarter endedDecember 31, 2021 .
Amortization of Intangible Assets
Amortization of intangible assets consists of expense related to intangible assets recorded in connection with our acquisitions. Our finite-lived intangible assets, consisting primarily of completed technology and customer contracts and relationships, are amortized using the straight-line method over periods ranging from five to ten years.
Amortization expense was
Gain on Product Line Asset Sale
The
Interest Expense, Net
Interest expense includes interest on the senior notes issued inDecember 2021 ,December 2019 andMay 2018 , as well as interest and credit agreement fees on the revolving line of credit and term loan. On our condensed consolidated statements of income and comprehensive income, interest expense is netted with interest income, which is derived primarily from the investment of funds in excess of our immediate operating requirements. The quarter-over-prior year quarter increase in interest expense of$10.6 million was primarily attributable to a higher average outstanding debt balance, as well as a higher average interest rate on our revolving line of credit and term loan during the quarter endedDecember 31, 2022 .
Other Income, Net
Other income, net consists primarily of unrealized investment gains/losses and realized gains/losses on certain investments classified as trading securities, exchange rate gains/losses resulting from remeasurement of foreign-currency-denominated receivable and cash balances held by our various reporting entities into their respective functional currencies at period-end market rates, net of the impact of offsetting foreign currency forward contracts, and other non-operating items. The quarter-over-prior year quarter decrease in other income, net of$1.1 million was primarily attributable to an increase in foreign currency exchange losses and a decrease in dividend income on investments classified as trading securities in our supplemental retirement and savings plan. 22
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Provision for Income Taxes
The effective income tax rate was 17.2% and 18.9% during the quarters endedDecember 31, 2022 and 2021, respectively. The provision for income taxes during interim quarterly reporting periods is based on our estimates of the effective tax rates for the full fiscal year. The effective tax rate in any quarter can also be affected positively or negatively by adjustments that are required to be reported in the specific quarter of resolution. The effective tax rates for the quarters endedDecember 31, 2022 and 2021 were both favorably impacted by the recording of excess tax benefits relating to stock awards. The impact is dependent upon grants of share-based compensation and the future stock price in relation to the fair value of awards on the grant date. The increase in stock price for awards that vested inDecember 2022 resulted in an increased net excess tax benefit for the quarter endedDecember 31, 2022 , as compared to the quarter endedDecember 31, 2021 .
Operating Income
The following tables set forth certain summary information on a segment basis related to our operating income for the quarters endedDecember 31, 2022 and 2021. Quarter Ended December 31, Period-to-Period Period-to-Period Segment 2022 2021 Change Percentage Change (In thousands) (In thousands) Scores$ 156,692 $ 148,323 $ 8,369 6 % Software 45,765 34,837 10,928 31 % Unallocated corporate expenses (34,082) (37,152) 3,070 (8) % Total segment operating income 168,375 146,008 22,367 15 % Unallocated share-based compensation (29,702) (29,878) 176 (1) % Unallocated amortization expense (275) (544) 269 (49) % Unallocated gain on product line asset sale 1,941 - 1,941 - % Operating income$ 140,339 $ 115,586 24,753 21 % Scores Software Quarter Ended Percentage of Quarter Ended Percentage of December 31, Revenues December 31, Revenues 2022 2021 2022 2021 2022 2021 2022 2021 (In thousands) (In thousands) Segment revenues$ 177,988 $ 169,487 100 % 100 %$ 166,882 $ 152,874 100 % 100 % Segment operating expense (21,296) (21,164) (12) % (12) % (121,117) (118,037) (73) % (77) % Segment operating income$ 156,692 $ 148,323 88 % 88 %$ 45,765 $ 34,837 27 % 23 % The quarter-over-prior year quarter increase in operating income of$24.8 million was primarily attributable to a$22.5 million increase in segment revenues, a$3.1 million decrease in corporate expenses, and a$1.9 million gain on product line asset sale during the quarter endedDecember 31, 2022 , partially offset by a$3.2 million increase in segment operating expenses. At the segment level, the quarter-over-prior year quarter increase in segment operating income of$22.4 million was the result of a$10.9 million increase in our Software segment operating income, an$8.4 million increase in our Scores segment operating income, and a$3.1 million decrease in corporate expenses. The quarter-over-prior year quarter increase in Scores segment operating income of$8.4 million was due to an$8.5 million increase in segment revenue, partially offset by a$0.1 million increase in segment operating expenses. Segment operating income as a percentage of segment revenue for Scores was 88%, consistent with the quarter endedDecember 31, 2021 . 23
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The quarter-over-prior year quarter increase in Software segment operating income of$10.9 million was due to a$14.0 million increase in segment revenue, partially offset by a$3.1 million increase in segment operating expenses. Segment operating income as a percentage of segment revenue for Software increased to 27% from 23%, primarily attributable to an increase in higher-margin license revenue recognized at a point in time and a decrease in sales of our lower-margin professional services. CAPITAL RESOURCES AND LIQUIDITY
Outlook
As ofDecember 31, 2022 , we had$139.9 million in cash and cash equivalents, which included$117.0 million held by our foreign subsidiaries. We believe our cash and cash equivalents balances, including those held by our foreign subsidiaries, as well as available borrowings from our$600 million revolving line of credit and anticipated cash flows from operating activities, will be sufficient to fund our working and other capital requirements for at least the next 12 months and thereafter for the foreseeable future, including the$15.0 million principal payments on our term loan due over the next 12 months. Under our current financing arrangements, we have no other significant debt obligations maturing over the next 12 months. For jurisdictions outside theU.S. where cash may be repatriated in the future, the Company expects the net impact of any repatriations to be immaterial to the Company's overall tax liability. In the normal course of business, we evaluate the merits of acquiring technology or businesses, or establishing strategic relationships with or investing in these businesses. We may elect to use available cash and cash equivalents to fund such activities in the future. In the event additional needs for cash arise, or if we refinance our existing debt, we may raise additional funds from a combination of sources, including the potential issuance of debt or equity securities. Additional financing might not be available on terms favorable to us, or at all. If adequate funds were not available or were not available on acceptable terms, our ability to take advantage of unanticipated opportunities or respond to competitive pressures could be limited.
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