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, 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 business relationships with vendors, customers or collaborators, including the proportion of revenues generated from international as opposed to domestic customers; and (v) statements regarding products, their characteristics, performance, sales potential or effect in the hands of customers. Words such as "believes," "anticipates," "expects," "intends," "targeted," "should," "potential," "goals," "strategy," "outlook," 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 II, Item 1A, Risk Factors of this Quarterly Report on Form 10-Q. 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 Current Reports on Form 8-K to be filed by us in fiscal 2020. OVERVIEW We use analytics to help businesses automate, improve and connect decisions across their enterprise - an approach we commonly refer to as decision management. Our predictive analytics, which includes the industry-standard FICO® Score, and our decision management systems leverage the use of big data and mathematical algorithms to predict, categorize, and describe consumer behavior in order to power hundreds of billions of customer decisions each year. We help thousands of companies in over 100 countries use our decision management technology to target and acquire customers more efficiently, increase customer value, detect and reduce fraud and credit losses, lower operating expenses, and enter new markets more profitably. Most leading banks and credit card issuers rely on our solutions, as do insurers, retailers, telecommunications providers, pharmaceutical companies, healthcare organizations, public agencies and organizations in other industries. We also serve consumers through online services that enable people to purchase and understand their FICO® Scores, the standard measure of consumer credit risk in theU.S. , and empower them to manage their financial health. Most of our solutions address customer engagement, including customer acquisition, customer onboarding, customer servicing and management, and customer protection. We also help businesses improve non-customer decisions such as streamlining transaction and claims processing, optimizing logistics, and identifying and quantifying security risk. Our solutions enable users to make decisions that are more precise, consistent and agile, and that systematically advance business goals. This helps our clients to reduce the cost of doing business, increase revenues and profitability, reduce losses from risks and fraud, and increase customer loyalty. We derive a significant portion of our revenues from clients outside theU.S. International revenues accounted for 33% and 37% of total consolidated revenues for the quarters endedDecember 31, 2019 and 2018, respectively. A significant portion of our revenues are derived from the sale of products and services within the banking (including consumer credit) industry, and 84% and 87% of our revenues were derived from within this industry during the quarters endedDecember 31, 2019 and 2018, respectively. In addition, we derive a significant share of revenues from transactional or unit-based software license fees, transactional fees derived under credit scoring, data processing, data management and SaaS subscription services arrangements, and annual software maintenance fees. Arrangements with transactional or unit-based pricing accounted for 74% of our revenues during each of the quarters endedDecember 31, 2019 and 2018. 20
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Revenue increased 14% to$298.5 million during the quarter endedDecember 31, 2019 from$262.3 million during the quarter endedDecember 31, 2018 . We continue to drive growth in our Scores segment. Scores revenue increased 34% to$115.1 million during the quarter endedDecember 31, 2019 from$85.7 million during the quarter endedDecember 31, 2018 . Scores operating income increased 35% to$97.4 million during the quarter endedDecember 31, 2019 from$72.2 million during the quarter endedDecember 31, 2018 . For our Applications andDecision Management Software segments, cloud business continues to grow as we pursue our cloud-first strategy. Cloud revenues increased 16% to$73.7 million during the quarter endedDecember 31, 2019 from$63.4 million during the quarter endedDecember 31, 2018 . Operating income increased 6% to$51.9 million during the quarter endedDecember 31, 2019 from$49.0 million during the quarter endedDecember 31, 2018 . Net earnings increased 37% to$54.9 million from$40.0 million primarily driven by higher excess tax benefits related to stock-based compensation as well as higher operating income during the quarter endedDecember 31, 2019 . We continue to enhance stockholder value by returning cash to stockholders through our stock repurchase program. During the quarter endedDecember 31, 2019 , we repurchased approximately 0.17 million shares at a total repurchase price of$60.0 million . As ofDecember 31, 2019 , we had$160.3 million remaining under our current stock repurchase program. Bookings Management uses bookings as an indicator of our business performance. Bookings represent contracts signed in the current reporting period that generate current and future revenue streams. We consider contract terms, knowledge of the marketplace and experience with our customers, among other factors, when determining the estimated value of contract bookings. While we disclose estimated revenue expected to be recognized in the future related to unsatisfied performance obligations in Note 13 to the accompanying condensed consolidated financial statements, we believe bookings amount is still a meaningful measure of our business as it includes estimated revenues omitted from Note 13, such as usage-based royalties derived from our software licenses, among others. Bookings calculations have varying degrees of certainty depending on the revenue type and individual contract terms. Our revenue types are transactional and maintenance, professional services and license as defined in Revenue Recognition in the Critical Accounting Policy and Estimates. Our estimate of bookings is as of the end of the period in which a contract is signed, and we do not update initial booking estimates in future periods for changes between estimated and actual results. Actual revenue and the timing thereof could differ materially from our initial estimates. The following paragraphs discuss the key assumptions used to calculate bookings and the susceptibility of these assumptions to variability. Transactional and Maintenance Bookings We calculate transactional bookings as the total estimated volume of transactions or number of accounts under contract, multiplied by the contractual rate. Transactional contracts generally span multiple years and require us to make estimates about future transaction volumes or number of active accounts. We develop estimates from discussions with our customers and examinations of historical data from similar products and customer arrangements. Differences between estimated bookings and actual results occur due to variability in the volume of transactions or number of active accounts estimated. This variability is primarily caused by the following:
• The health of the economy and 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 calculate maintenance bookings directly from the terms stated in the contract.
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Professional Services Bookings
We calculate professional services bookings as the estimated number of hours to
complete a project multiplied by the rate per hour. We estimate the number of
hours based on our understanding of the project scope, conversations with
customer personnel and our experience in estimating professional services
projects. Estimated bookings may differ from actual results primarily due to
differences in the actual number of hours incurred. These differences typically
result from customer decisions to alter the mix of FICO and customer services
resources used to complete a project.
License Bookings
On-premises licenses are sold on a perpetual or term basis. When the fee is in
the form of a fixed consideration, including the guaranteed minimum in
usage-based royalty, the fixed amount is recorded as a license booking. The
variable amount, including usage-based royalty not subject to the guaranteed
minimum or earned in excess of the minimum amount is recorded as a transactional
and maintenance booking. Please refer to Transactional and Maintenance Bookings
above on how we develop estimates for such bookings.
Bookings Trend Analysis
Number of
Bookings Weighted-
Bookings over $1 Average
Bookings Yield (1) Million Term (2)
(In millions) (Months)
Quarter Ended December 31, 2019 $ 112.1 14 % 25 39
Quarter Ended December 31, 2018 $ 106.6 15 % 23 31
(1) Bookings yield represents the percentage of revenue recognized from bookings
for the periods indicated.
(2) Weighted-average term of bookings measures the average term over which
bookings are expected to be recognized as revenue.
Transactional and maintenance bookings were 37% and 55% of total bookings for the quarters endedDecember 31, 2019 and 2018, respectively. Professional services bookings were 36% and 33% of total bookings for the quarters endedDecember 31, 2019 and 2018, respectively. License bookings were 27% and 12% of total bookings for the quarters endedDecember 31, 2019 and 2018, respectively. RESULTS OF OPERATIONS
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 2019 2018 2019 2018 Change Percentage Change
(In thousands) (In thousands)Applications$ 152,178 $ 147,659 51 % 56 % $ 4,519 3 % Scores 115,138 85,683 39 % 33 % 29,455 34 % Decision Management Software 31,188 28,914 10 % 11 % 2,274 8 % Total$ 298,504 $ 262,256 100 % 100 % 36,248 14 % 22
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Applications
Quarter Ended December 31, Period-to-Period Period-to-Period
2019 2018 Change Percentage Change
(In thousands) (In thousands)
Transactional and maintenance $ 98,837 $ 97,165 $ 1,672 2 %
Professional services 34,023 31,462 2,561 8 %
License 19,318 19,032 286 2 %
Total $ 152,178 $ 147,659 4,519 3 %
Applications segment revenues increased $4.5 million primarily due to a $4.4
million increase in our originations solutions, driven by an increase in
services revenue and SaaS subscription revenue classified as transactional and
maintenance revenue.
Scores
Quarter Ended December 31, Period-to-Period Period-to-Period
2019 2018 Change Percentage Change
(In thousands) (In thousands)
Transactional and maintenance $ 107,446 $ 84,821 $ 22,625 27 %
Professional services 264 701 (437 ) (62 )%
License 7,428 161 7,267 4,514 %
Total $ 115,138 $ 85,683 29,455 34 %
Scores segment revenues increased $29.5 million due to an increase of $26.4
million in our business-to-business scores revenue and $3.1 million in our
business-to-consumer services revenue. The increase in business-to-business
scores was primarily attributable to a higher unit price in auto activities, an
increase in mortgage volumes, as well as a large annual license deal recognized
during the quarter ended December 31, 2019 . The increase in business-to-consumer
services was primarily attributable to an increase in royalties derived from
scores sold indirectly to consumers through credit reporting agencies.
During the quarters ended December 31, 2019 and 2018, revenues generated from
our agreements with Experian accounted for 13% and 11%, respectively, of our
total revenues, and revenues generated from our agreements with Equifax and
TransUnion together accounted for 16% and 14%, respectively, of our total
revenues. Revenues from these customers included amounts recorded in our other
segments.
Quarter Ended December 31, Period-to-Period
2019 2018 Period-to-Period Change Percentage Change
(In thousands) (In thousands)
Transactional and maintenance $ 14,091 $ 12,207 $ 1,884 15 %
Professional services 9,738 8,645 1,093 13 %
License 7,359 8,062 (703 ) (9 )%
Total $ 31,188 $ 28,914 2,274 8 %
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Operating Expenses and Other Income / Expenses The following tables set forth certain summary information related to our condensed consolidated statements of income and comprehensive income for the quarters endedDecember 31, 2019 and 2018: Quarter Ended December 31, Percentage of Revenues Period-to- Period-to-Period Period 2019 2018 2019 2018 Change Percentage Change (In thousands, except (In thousands, employees) except employees) Revenues$ 298,504 $ 262,256 100 % 100 % $ 36,248 14 % Operating expenses: Cost of revenues 90,758 76,066 30 % 29 % 14,692 19 % Research and development 38,943 35,426 13 % 13 % 3,517 10 % Selling, general and administrative 112,021 100,258 38 % 38 % 11,763 12 % Amortization of intangible assets 1,796 1,502 1 % 1 % 294 20 % Restructuring and acquisition-related 3,104 - 1 % - % 3,104 - % Total operating expenses 246,622 213,252 83 % 81 % 33,370 16 % Operating income 51,882 49,004 17 % 19 % 2,878 6 % Interest expense, net (9,768 ) (9,676 ) (3 ) (4 )% (92 ) 1 % Other expense, net (219 ) (2,172 ) - (1 )% 1,953 (90 )% Income before income taxes 41,895 37,156 14 % 14 % 4,739 13 % Income tax benefit (13,026 ) (2,851 ) (4 )% (1 )% (10,175 ) 357 % Net income$ 54,921 $ 40,007 18 % 15 % 14,914 37 % Number of employees at quarter end 3,956 3,772 184 5 % Cost of Revenues Cost of revenues consists primarily of employee salaries and benefits for personnel directly involved in delivering software products, operating SaaS infrastructure, and providing support, implementation and consulting services; allocated 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. Cost of revenues as a percentage of revenues increased to 30% during the quarter endedDecember 31, 2019 from 29% during the quarter endedDecember 31, 2018 . The$14.7 million increase was primarily attributable to a$4.6 million increase in personnel and labor costs, a$3.9 million increase in allocated facilities and infrastructure costs, and a$3.6 million increase in direct materials cost. The increase in personnel and labor costs was primarily attributable to an increase in headcount. The increase in facilities and infrastructure costs and direct materials cost was primarily attributable to increased resource requirement due to expansion in our cloud infrastructure operations. 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 Applications andDecision Management Software products. The quarter over quarter increase in research and development expenses of$3.5 million was primarily attributable to an increase in labor and personnel costs as a result of increased headcount. Research and development expenses as a percentage of revenues was 13% during the quarter endedDecember 31, 2019 , consistent with that incurred during the quarter endedDecember 31, 2018 . 24
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Selling, General and Administrative Selling, general and administrative expenses consist principally of employee salaries, commissions and benefits; travel costs; overhead costs; advertising and other promotional expenses; corporate facilities expenses; legal expenses; business development expenses and the cost of operating computer systems. The quarter over quarter increase in selling, general and administrative expenses of$11.8 million was primarily attributable to a$6.7 million increase in personnel and labor costs as a result of increased headcount; as well as a$4.2 million increase in marketing costs, primarily driven by a company-wide marketing event - FICO WORLD19 - held during the quarter endedDecember 31, 2019 . Selling, general and administrative expenses as a percentage of revenues was 38% during the quarter endedDecember 31, 2019 , consistent with that incurred during the quarter endedDecember 31, 2018 . Amortization of Intangible Assets Amortization of intangible assets consists of amortization expense related to intangible assets recorded in connection with acquisitions accounted for by the acquisition method of accounting. Our finite-lived intangible assets, consisting primarily of completed technology and customer contracts and relationships, are being amortized using the straight-line method over periods ranging from four to fifteen years. Amortization expense was$1.8 million during the quarter endedDecember 31, 2019 versus$1.5 million during the quarter endedDecember 31, 2018 . Restructuring and Acquisition-Related During the quarter endedDecember 31, 2019 , we incurred employee separation costs of$3.1 million due to the elimination of 69 positions throughout the Company. Cash payment for all the employee separation costs will be paid by the end of the second quarter of our fiscal 2020. There was no acquisition-related expense during the quarter endedDecember 31, 2019 . There were no restructuring or acquisition-related expenses during the quarter endedDecember 31, 2018 . Interest Expense, Net Interest expense includes primarily interest on the senior notes issued inJuly 2010 ,May 2018 , andDecember 2019 , as well as interest and credit facility fees on the revolving line of credit. Our consolidated statements of income and comprehensive income include interest expense netted with interest income, which is derived primarily from the investment of funds in excess of our immediate operating requirements. Interest expense was$9.9 million during the quarter endedDecember 31, 2019 versus$9.7 million during the quarter endedDecember 31, 2018 . Other Expense, Net Other expense, net consists primarily of realized investment gains/losses, exchange rate gains/losses resulting from remeasurement of foreign-currency-denominated receivable and cash balances 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 quarter decrease of$2.0 million in other expense, net was primarily due to an increase in net unrealized gains on our supplemental retirement and savings plan, partially offset by an increase in foreign currency exchange loss. Income Tax Benefit The effective income tax rate was (31.1)% and (7.7)% during the quarters endedDecember 31, 2019 and 2018, respectively. The provision for income taxes during interim quarterly reporting periods is based on our estimates of the effective tax rates for the full fiscal year. The effective tax rate in any quarter can also be affected positively or negatively by adjustments that are required to be reported in the specific quarter of resolution. The effective tax rate for the quarters endedDecember 31, 2019 and 2018 was significantly impacted by the recording of excess tax benefits relating to stock awards that vested in December of each period. The impact is dependent upon the future stock price in relation to the fair value of awards on grant date. Therefore, the increase in stock price for stock awards that vested inDecember 2019 resulted in an increased excess tax benefit for the quarter endedDecember 31, 2019 . 25
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Operating Income The following tables set forth certain summary information on a segment basis related to our operating income for the quarters endedDecember 31, 2019 and 2018: Quarter Ended December 31, Period-to-Period Period-to-Period Segment 2019 2018 Change Percentage Change (In thousands) (In thousands) Applications$ 36,168 $ 40,061 $ (3,893 ) (10 )% Scores 97,426 72,201 25,225 35 % Decision Management Software (19,457 ) (10,648 ) (8,809 ) 83 % Corporate expenses (34,210 ) (29,254 ) (4,956 ) 17 % Total segment operating income 79,927 72,360 7,567 10 % Unallocated share-based compensation (23,145 ) (21,854 ) (1,291 ) 6 % Unallocated amortization expense (1,796 ) (1,502 ) (294 ) 20 % Unallocated restructuring and acquisition-related (3,104 ) - (3,104 ) - % Operating income$ 51,882 $ 49,004 2,878 6 % Applications Quarter Ended Percentage of December 31, Revenues 2019 2018 2019 2018 (In thousands)
Segment revenues
Scores
Quarter Ended Percentage of
December 31, Revenues
2019 2018 2019 2018
(In thousands)
Segment revenues
Decision Management Software Quarter Ended Percentage of December 31, Revenues 2019 2018 2019 2018 (In thousands)
Segment revenues
The quarter over quarter$2.9 million increase in operating income was primarily attributable to a$36.2 million increase in segment revenues, partially offset by a$23.7 million increase in segment operating expenses, a$4.9 million increase in corporate expenses, a$3.1 million increase in restructuring and acquisition-related cost, and a$1.3 million increase in share-based compensation cost. 26
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At the segment level, the quarter over quarter$7.6 million increase in segment operating income was the result of a$25.2 million increase in our Scores segment operating income, partially offset by an$8.8 million increase in ourDecision Management Software segment operating loss, a$4.9 million increase in corporate expense, and a$3.9 million decrease in our Applications segment operating income. The quarter over quarter$3.9 million decrease in Applications segment operating income was due to an$8.4 million increase in segment operating expenses, partially offset by a$4.5 million increase in segment revenue. Segment operating income as a percentage of segment revenue for Applications decreased to 24% from 27% primarily due to increased headcount as well as our continued investment in cloud infrastructure operations. The quarter over quarter$25.2 million increase in Scores segment operating income was due to a$29.4 million increase in segment revenue, partially offset by a$4.2 million increase in segment operating expenses. Segment operating income as a percentage of segment revenue for Scores during the quarter endedDecember 31, 2019 was 85%, materially consistent with the quarter endedDecember 31, 2018 . The quarter over quarter$8.8 million increase inDecision Management Software segment operating loss was due to an$11.1 million increase in segment operating expenses, partially offset by a$2.3 million increase in segment revenue. Segment operating margin forDecision Management Software decreased to a negative 62% from a negative 37% primarily due to increase headcount as well as our continued investment in cloud infrastructure operations. CAPITAL RESOURCES AND LIQUIDITY
Outlook
As ofDecember 31, 2019 , we had$111.2 million in cash and cash equivalents, which included$88.7 million held off-shore by our foreign subsidiaries. We believe these balances, as well as available borrowings from our$400 million revolving line of credit and anticipated cash flows from operating activities, will be sufficient to fund our working and other capital requirements as well as the$85.0 million principal payment due inJuly 2020 on our senior notes issued inJuly 2010 . Under our current financing arrangements, we have no other significant debt obligations maturing over the next twelve months. Additionally, though we do not anticipate the need to repatriate any undistributed earnings from our foreign subsidiaries for the foreseeable future, we may take advantage of opportunities where we are able to repatriate these earnings to theU.S. without material incremental tax provision. 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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