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FICO > SEC Filings for FICO > Form 10-K on 16-Nov-2012All Recent SEC Filings

Show all filings for FAIR ISAAC CORP

Form 10-K for FAIR ISAAC CORP


16-Nov-2012

Annual Report


Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations

OVERVIEW

Our Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") begins with an overview of our key operating business segments and significant trends. This overview is followed by a more detailed analysis of our results of operations and financial condition, including liquidity and capital resources, which discusses key aspects of our statements of cash flows, changes in our balance sheets and our financial commitments. We then provide a summary of our critical accounting policies and estimates we believe are important to understanding the assumptions and judgments incorporated in our reported financial results. Our MD&A should be read in conjunction with Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K.

Business Overview

We are a leader in Decision Management solutions that enable businesses to automate, improve and connect decisions to enhance business performance. Our predictive analytics, which include the industry standard FICO® score, and our Decision Management systems power billions of customer decisions each year. We help companies acquire customers more efficiently, increase customer value, reduce fraud and credit losses, lower operating expenses and enter new markets more profitably. Our clients utilize our products and services to facilitate a variety of business processes, including customer marketing and acquisition, account origination, credit and underwriting risk management, fraud loss prevention and control, and client account and policyholder management. Most leading banks and credit card issuers rely on our solutions, as do many insurers, retailers, healthcare organizations, pharmaceutical companies and government agencies. We also serve consumers through online services that enable people to purchase and understand their FICO ® scores, the standard measure in the United States of credit risk, empowering them to manage their financial health. On September 7, 2012, we completed the acquisition of Adeptra. The acquisition brought us a SaaS offering that increases value for our clients and provides a global footprint across multiple industries consistent with our strategy to expand into the fast-growing mobile economy. The results of Adeptra's operations from the acquisition date are included in our Applications segment.

General economic conditions continued to improve in fiscal 2012 from which we realized overall growth in our revenues of 9% to $676.4 million from $619.7 million in fiscal 2011. Revenue in each of our segments increased, with Applications, Scores and Tools increasing by 11%, 4% and 12% in fiscal 2012 compared to 2011, respectively. The revenue growth for each segment was primarily driven by fees recognized under large multi-year license transactions or other large non-recurring projects. In our Applications segment, we had large multi-year license transactions in our fraud and customer management solutions; in our Scores segment we had large non-recurring projects in our business-to-business scores; and in our Tools segment license sales and associated services of Blaze Advisor and Xpress Optimization products. A significant portion of our revenues are derived from the sale of products and services within the banking (including consumer credit) industry, and 77%, 74% and 72% of our revenues were derived from within this industry during the years ended September 30, 2012, 2011 and 2010, respectively. Our remaining revenues are primarily derived from the insurance, healthcare and retail industries. Our revenues derived from clients outside the United States have generally grown, and may in the future grow more rapidly than our revenues from domestic clients. International revenues totaled $266.2 million, $230.0 million and $209.6 million in fiscal 2012, 2011 and 2010, respectively, representing 39%, 37% and 35% of total consolidated revenues in each of these years.

A significant portion of our revenues are derived from transactional or unit-based software license fees, annual license fees under long-term software license arrangements, transactional fees derived under scoring, network service or internal hosted software arrangements, and annual software maintenance fees. Arrangements with transactional or unit-based pricing accounted for approximately 69%, 73% and 75% of our revenues during


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fiscal 2012, 2011 and 2010, respectively. The recurrence of these revenues is, to a significant degree, dependent upon our clients' continued usage of our products and services in their business activities. The more significant activities underlying the use of our products in these areas include: credit and debit card usage or active account levels; lending acquisition, origination and customer management activity; and customer acquisition, cross selling and retention programs. We also derive revenues from other sources which generally do not recur and include, but are not limited to, perpetual or time-based licenses with upfront payment terms and non-recurring consulting service arrangements.

Also recognized during the fourth quarter of fiscal 2012 were additional restructuring charges under our ongoing reengineering initiative. We incurred net charges totaling $4.0 million for severance costs associated with the reduction of 85 positions mainly within the product and technology organization of the Company.

For 2013, the operating environment will continue to present challenges for the marketing and growth of our products and services. However, we do expect to derive growth through modest improvements in the credit economy and from strategic acquisitions that complement our product offerings.

Bookings

Management uses bookings as an indicator of our business performance. Bookings represent contracts signed in the current reporting period that will 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.

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. Our estimate of bookings is as of the end of the period in which a contract is signed, and we do not update our 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 a 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.

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 internal resources used to complete a project.


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License Bookings

Licenses are sold on a perpetual or term basis and bookings generally equal the fixed amount stated in the contract.

Bookings Trend Analysis



                                                                               Number of
                                                                                Bookings          Weighted-
                                                              Bookings          over $1            Average
                                         Bookings            Yield (1)          Million           Term (2)
                                       (in millions)                                              (months)
Quarter ended September 30, 2012      $          98.6                32 %              19                 29

Quarter ended September 30, 2011      $         112.0                13 %              14                 27

Year ended September 30, 2012         $         293.8                43 %              54                N/M

Year ended September 30, 2011         $         303.6                34 %              45                N/M

(1) Bookings yield represents the percentage of revenue recognized from bookings for the periods indicated.

(2) NM - Measure is not meaningful as our estimate of bookings is as of the end of the period in which a contract is signed, and we do not update our initial booking estimates in future periods for changes between estimated and actual results.

Transactional and maintenance bookings were 40% and 43% of total bookings for the quarters ended September 30, 2012 and 2011, respectively. Professional services bookings were 34% and 34% of total bookings for the quarters ended September 30, 2012 and 2011, respectively. License bookings were 26% and 23% of total bookings for the quarters ended September 30, 2012 and 2011, respectively.

Transactional and maintenance bookings were 35% and 44% of total bookings for the years ended September 30, 2012 and 2011, respectively. Professional services bookings were 43% and 36% of total bookings for the years ended September 30, 2012 and 2011, respectively. License bookings were 22% and 20% of total bookings for the years ended September 30, 2012 and 2011, respectively.

The weighted-average term of bookings achieved measures the average term over which the bookings are expected to be recognized as revenue. As the weighted-average term increases, the average amount of revenues expected to be realized in a quarter decreases; however, the revenues are expected to be recognized over a longer period of time. As the weighted-average term decreases, the average amount of revenues expected to be realized in a quarter increases; however, the revenues are expected to be recognized over a shorter period of time.

Management regards the volume of bookings achieved, among other factors, as an important indicator of future revenues, but they are not comparable to, nor should they be substituted for, an analysis of our revenues, and they are subject to a number of risks and uncertainties concerning timing and contingencies affecting product delivery and performance.

Although many of our contracts contain noncancelable terms, most of our bookings are transactional or service related and are dependent upon estimates such as volume of transactions, number of active accounts, or number of hours incurred. Since these estimates cannot be considered fixed or firm, we do not believe it is appropriate to characterize bookings as backlog.

Segment Information

We are organized into the following three reportable segments: Applications, Scores and Tools. 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


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information to make operating decisions and assess performance. Comparative segment revenues, operating income, and related financial information for the years ended September 30, 2012, 2011 and 2010 are set forth in Note 17 to the accompanying consolidated financial statements.

RESULTS OF OPERATIONS

Revenues

The following tables set forth certain summary information on a segment basis
related to our revenues for the fiscal years indicated.



                                                                                                                       Period-to-Period
                                               Revenues                         Period-to-Period Change               Percentage  Change
                                              Fiscal Year                      2012 to           2011 to          2012  to           2011  to
Segment                           2012           2011           2010             2011              2010             2011               2010
                                            (In thousands)                          (In thousands)
Applications                    $ 424,604      $ 383,028      $ 367,258      $     41,576       $   15,770               11 %                4 %
Scores                            175,623        168,567        172,339             7,056           (3,772 )              4 %               (2 )%
Tools                              76,196         68,088         66,046             8,108            2,042               12 %                3 %

Total Revenues                  $ 676,423      $ 619,683      $ 605,643            56,740           14,040                9 %                2 %

                                         Percentage of Revenues
                                               Fiscal Year
                    Segment           2012          2011       2010
                    Applications          63 %         62 %       61 %
                    Scores                26 %         27 %       28 %
                    Tools                 11 %         11 %       11 %

                    Total Revenues       100 %        100 %      100 %

Applications



                                                                                                                      Period-to-Period
                                               Fiscal Year                      Period-to-Period Change               Percentage Change
                                                                                2012 to           2011 to         2012 to           2011 to
                                   2012           2011           2010             2011             2010            2011              2010
                                             (In thousands)                          (In thousands)
Transactional and maintenance    $ 263,726      $ 258,736      $ 257,275      $      4,990       $   1,461               2 %               1 %
Professional services              104,637        100,921         86,097             3,716          14,824               4 %              17 %
License                             56,241         23,371         23,886            32,870            (515 )           141 %              (2 )%

Total                            $ 424,604      $ 383,028      $ 367,258            41,576          15,770              11 %               4 %

Applications segment revenues increased $41.6 million in fiscal 2012 from fiscal 2011 primarily due to a $25.3 million increase in our fraud solutions, an $8.0 million increase in our customer management solutions, a $4.2 million increase in our Mobility solutions and a $4.0 million increase in our Collections & Recovery solutions.

The increase in fraud solutions revenue was primarily due to software revenue attributable to two large multi-year license transactions during fiscal 2012. In addition, the fraud solutions revenue was also impacted by increased professional services revenue from software implementations and consulting services and a decrease in transactional-based revenues. The increase in customer management solutions revenue was due to an increase in


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software revenue primarily driven by a large license transaction, increased services revenue as well as increased transactional and maintenance revenue. The increase in Mobility solutions was due to our acquisition of Adeptra in September 2012. The increase in Collections & Recovery solutions was mainly due to an increase in license sales.

Applications segment revenues increased $15.8 million in fiscal 2011 from fiscal 2010 due to an $18.2 million increase in our fraud solutions and a $6.0 million increase in our originations solutions. These increases were partially offset by a $4.8 million decrease in our customer management solutions, and a $3.6 million decrease from our other Applications solutions.

The increase in fraud solutions was attributable to higher volumes associated with transactional-based agreements, increased software sales of FICO® Falcon® Fraud Manager and FICO®Insurance Fraud Manager, and increased services related to these software sales. The increase in originations solutions was attributable to an increase in professional services, and sales of a new product, FICO ® Originations Manager, partially offset by a decrease in volumes associated with transactional-based agreements on existing products. The decrease in customer management solutions was attributable to a decline in license revenue and a decline in professional services.

Scores



                                                                                                                      Period-to-Period
                                               Fiscal Year                      Period-to-Period Change               Percentage Change
                                                                                2012 to           2011 to        2012 to            2011 to
                                   2012           2011           2010            2011              2010            2011              2010
                                             (In thousands)                          (In thousands)
Transactional and maintenance    $ 172,218      $ 164,918      $ 170,141      $     7,300        $  (5,223 )            4 %               (3 )%
Professional services                2,382          2,102          2,042              280               60             13 %                3 %
License                              1,023          1,547            156             (524 )          1,391            (34 )%             892 %

Total                            $ 175,623      $ 168,567      $ 172,339            7,056           (3,772 )            4 %               (2 )%

Scores segment revenues increased $7.1 million in fiscal 2012 from 2011 due to a $9.2 million increase in our business-to-business scores revenues partially offset by a $2.1 million decrease in our myFICO® business-to-consumer services revenues. The increase in our business-to-business scores was primarily attributable to an increase in Credit Bureau Risk Scores driven by a couple of special projects conducted by a major customer utilizing historical Credit Bureau Risk Scores, and an increase in transactional volumes. The decline in our myFICO business-to-consumer services was primarily attributable to a decrease in royalties derived from scores sold indirectly to consumers through credit reporting agencies.

Scores segment revenues decreased $3.8 million in fiscal 2011 from 2010 due to a $2.1 million decrease in our myFICO® business-to-consumer services revenues and a $1.7 million decrease in our business-to-business scores revenues. The decline in business-to-consumer services was primarily attributable to a decrease in royalties derived from scores sold indirectly to consumers through credit reporting agencies. This decline was partially offset by stronger direct sales generated from the myFICO.com website. Business-to-business scores revenues decrease was mainly attributable to a decrease in credit bureau risk scores revenues.

During fiscal 2012, 2011 and 2010, revenues generated from our agreements with Equifax, TransUnion and Experian, collectively accounted for approximately 18%, 18% and 20%, respectively, of our total revenues, including revenues from these customers that are recorded in our other segments.


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Tools



                                                                                                                      Period-to-Period
                                             Fiscal Year                       Period-to-Period Change               Percentage Change
                                                                             2012 to            2011 to          2012 to           2011 to
                                   2012          2011          2010           2011               2010              2011             2010
                                            (In thousands)                         (In thousands)
Transactional and maintenance    $ 30,231      $ 29,776      $ 28,071      $       455       $       1,705              2 %               6 %
Professional services              17,952        12,918        14,739            5,034              (1,821 )           39 %             (12 )%
License                            28,013        25,394        23,236            2,619               2,158             10 %               9 %

Total                            $ 76,196      $ 68,088      $ 66,046            8,108               2,042             12 %               3 %

Tools segment revenues increased $8.1 million in fiscal 2012 from fiscal 2011 primarily due to an increase in our services revenue and license revenue. The increase in our services revenue was primarily attributable to increased professional services related to our FICO® Blaze Advisor® product. The increase in our license revenue was primarily attributable to an increase in our FICO® Xpress Optimization Suite and FICO® Blaze Advisor® product sales.

Tools segment revenues increased $2.0 million in fiscal 2011 from fiscal 2010 primarily due to an increase in license and maintenance revenues related to our FICO® Blaze Advisor ® product. The increase was partially offset by a decrease in license sales related to our FICO ® Model Builder and FICO® Decision Optimizer products, and a decrease in professional services related to our FICO® Blaze Advisor® as a result of the completion of several large installations in the prior year.

Operating Expenses and Other Income (Expense), Net

The following tables set forth certain summary information related to our
consolidated statements of income and comprehensive income for the fiscal years
indicated.



                                                                                                                                    Period-to-Period
                                                                                             Period-to-Period Change               Percentage Change
                                                        Fiscal Year                       2012 to              2011 to          2012 to          2011 to
                                            2012            2011           2010             2011                 2010            2011             2010
                                                                                              (In thousands, except
                                             (In thousands, except employees)                      employees)
Revenues                                 $   676,423      $ 619,683      $ 605,643      $     56,740        $      14,040              9 %              2 %

Operating expenses:
Cost of revenues                             197,947        186,470        180,932            11,477                5,538              6 %              3 %
Research and development                      59,527         62,129         73,581            (2,602 )            (11,452 )           (4 )%           (16 )%
Selling, general and administrative          238,522        223,615        225,263            14,907               (1,648 )            7 %             (1 )%
Amortization of intangible assets              6,944          7,741         10,901              (797 )             (3,160 )          (10 )%           (29 )%
Restructuring and acquisition-related          5,125         12,391          1,617            (7,266 )             10,774            (59 )%           666 %

Total operating expenses                     508,065        492,346        492,294            15,719                   52              3 %             -  %

Operating income                             168,358        127,337        113,349            41,021               13,988             32 %             12 %
Interest income                                  317          2,192          1,688            (1,875 )                504            (86 )%            30 %
Interest expense                             (31,734 )      (32,364 )      (24,124 )             630               (8,240 )           (2 )%            34 %
Other income (expense), net                     (698 )          290          1,391              (988 )             (1,101 )         (341 )%           (79 )%

Income before income taxes                   136,243         97,455         92,304            38,788                5,151             40 %              6 %
Provision for income taxes                    44,239         25,893         27,847            18,346               (1,954 )           71 %             (7 )%

Net income                               $    92,004      $  71,562      $  64,457            20,442                7,105             29 %             11 %

Number of employees at fiscal year-end         2,315          2,023          2,157               292                 (134 )


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                                                    Percentage of Revenues
                                                          Fiscal Year
                                                 2012         2011        2010
        Revenues                                    100 %       100 %       100 %

        Operating expenses:
        Cost of revenues                             29 %        30 %        30 %
        Research and development                      9 %        10 %        12 %
        Selling, general and administrative          35 %        36 %        37 %
        Amortization of intangible assets             1 %         1 %         2 %
        Restructuring and acquisition-related         1 %         2 %        -  %

        Total operating expenses                     75 %        79 %        81 %

. . .
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