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FICO > SEC Filings for FICO > Form 10-Q on 29-Apr-2013All Recent SEC Filings

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Form 10-Q for FAIR ISAAC CORP


29-Apr-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

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 "Act"). In addition, certain statements in our future filings with the Securities 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 Act. Examples of forward-looking statements include, but are not limited to: (i) projections of revenue, income or loss, 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," 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. 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 the SEC, including our reports on Forms 10-Q and 8-K to be filed by FICO in fiscal 2013.

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.

A significant portion of our revenues are derived from the sale of products and services within the consumer banking industry, and approximately 74% and 76% of our revenues during the quarters ended March 31, 2013 and 2012, respectively, and 73% and 76% of our revenues during the six months ended March 31, 2013 and 2012, respectively, were derived from within this industry. 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 $70.5 million and $57.0 million during the quarters ended March 31, 2013 and 2012, respectively, representing 39% and 36% of total consolidated revenues in each of these periods. International revenues totaled $145.7 and $129.3 million during the six months ended March 31, 2013 and 2012, respectively, representing 39% of total consolidated revenues in each of these periods.

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 71% and 72% of our revenues during the quarters ended March 31, 2013 and 2012, respectively. Arrangements with transactional or unit-based pricing accounted for approximately 69% of our revenues during the six months ended March 31, 2013 and


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2012. 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.

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 services resources used to complete a project.

License Bookings

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


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Bookings Trend Analysis



                                                                               Number of
                                                                                Bookings        Weighted-
                                                              Bookings          over $1          Average
                                          Bookings           Yield (1)          Million          Term (2)
                                        (in millions)                                            (months)
Quarter Ended March 31, 2013           $          84.8               18 %              16               24
Quarter Ended March 31, 2012           $          78.4               24 %              13               23
Six Months Ended March 31, 2013        $         166.8               30 %              26               NM
Six Months Ended March 31, 2012        $         137.6               31 %              27               NM

(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 46% and 37% of total bookings for the quarters ended March 31, 2013 and 2012, respectively. Professional services bookings were 44% and 44% of total bookings for the quarters ended March 31, 2013 and 2012, respectively. License bookings were 10% and 19% of total bookings for the quarters ended March 31, 2013 and 2012, respectively.

Transactional and maintenance bookings were 40% and 35% of total bookings for the six months ended March 31, 2013 and 2012, respectively. Professional services bookings were 39% and 45% of total bookings for the six months ended March 31, 2013 and 2012, respectively. License bookings were 21% and 20% of total bookings for the six months ended March 31, 2013 and 2012, 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 non-cancelable 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.


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                             RESULTS OF OPERATIONS

Revenues

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



                                                          Quarter Ended March 31,           Percentage of Revenues
                                                                                                                                                    Period-to-Period
                                                                                                                            Period-to-Period           Percentage
Segment                                                    2013               2012          2013              2012               Change                  Change
                                                              (In thousands)                                                 (In thousands)
Applications                                          $       117,215       $  96,134            65 %              60 %    $           21,081                      22 %
Scores                                                         44,062          44,425            25 %              28 %                  (363 )                    (1 )%
Tools                                                          18,048          18,962            10 %              12 %                  (914 )                    (5 )%

Total revenue                                         $       179,325       $ 159,521           100 %             100 %                19,804                      12 %


                                                        Six Months Ended March 31,          Percentage of Revenues
                                                                                                                                                    Period-to-Period
                                                                                                                            Period-to-Period           Percentage
Segment                                                    2013               2012          2013              2012               Change                  Change
                                                              (In thousands)                                                 (In thousands)
Applications                                          $       241,922       $ 206,350            65 %              63 %    $           35,572                      17 %
Scores                                                         87,509          86,967            24 %              26 %                   542                       1 %
Tools                                                          39,914          36,553            11 %              11 %                 3,361                       9 %

Total revenue                                         $       369,345       $ 329,870           100 %             100 %                39,475                      12 %

Quarter Ended March 31, 2013 Compared to Quarter Ended March 31, 2012

Applications



                                               Quarter Ended March 31,
                                                                                                     Period-to-Period
                                                                               Period-to-Period         Percentage
                                                 2013              2012             Change                Change
                                                    (In thousands)              (In thousands)
Transactional and maintenance                $      76,012       $ 63,523     $           12,489                    20 %
Professional services                               27,315         25,756                  1,559                     6 %
License                                             13,888          6,855                  7,033                   103 %

Total                                        $     117,215       $ 96,134                 21,081                    22 %

Applications segment revenues increased $21.1 million primarily due to a $13.3 million increase in our mobility solutions and a $9.8 million increase in our fraud solutions, partially offset by a $2.4 million decrease in our marketing solutions.

The increase in mobility solutions revenues was due to our Adeptra acquisition in September 2012. The increase in fraud solutions revenues was primarily attributable to an increase in software revenue largely driven by a large multi-year license transaction during the quarter ended March 31, 2013. The decrease in marketing solutions was primarily attributable to the early termination of a large customer in December 2012.


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Scores



                                              Quarter Ended March 31,
                                                                                                     Period-to-Period
                                                                              Period-to-Period          Percentage
                                                2013             2012              Change                 Change
                                                   (In thousands)              (In thousands)
Transactional and maintenance               $     42,206       $  43,636     $           (1,430 )                   (3 )%
Professional services                              1,624             521                  1,103                    212 %
License                                              232             268                    (36 )                  (13 )%

Total                                       $     44,062       $  44,425                   (363 )                   (1 )%

Scores segment revenues decreased $0.4 million due to a decrease of $1.6 million in our business-to-business Scores revenue partially offset by an increase of $1.2 million in our myFICO business-to-consumer services revenue. The decrease in our business-to-business Scores was primarily attributable to a special project conducted by a large customer utilizing historical Credit Bureau Risk Scores during the quarter ended March 31, 2012, partially offset by an increase in recurring revenue from Credit Bureau Risk Scores during the quarter ended March 31, 2013. The increase in business-to-consumer services was primarily attributable to stronger direct sales generated from the myFICO.com website partially offset by a decline in royalties derived from scores sold indirectly to consumers through credit reporting agencies.

During the quarters ended March 31, 2013 and 2012, revenues generated from our agreements with Equifax, TransUnion and Experian collectively accounted for approximately 15% and 19%, respectively, of our total revenues, including revenues from these customers that are recorded in our other segments.

Tools



                                              Quarter Ended March 31,
                                                                                                     Period-to-Period
                                                                              Period-to-Period          Percentage
                                                2013             2012              Change                 Change
                                                   (In thousands)              (In thousands)
Transactional and maintenance               $      8,221       $   7,684     $              537                      7 %
Professional services                              5,170           4,184                    986                     24 %
License                                            4,657           7,094                 (2,437 )                  (34 )%

Total                                       $     18,048       $  18,962                   (914 )                   (5 )%

Tools segment revenues decreased $0.9 million primarily due to decreased license revenue generated from sales of our Blaze product, partially offset by increased professional services revenue related to our Blaze and third-party products in our rules management tools.


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Six Months Ended March 31, 2013 Compared to Six Months Ended March 31, 2012

Applications



                                              Six Months Ended March 31,
                                                                                                        Period-to-Period
                                                                                 Period-to-Period          Percentage
                                                 2013               2012              Change                 Change
                                                    (In thousands)                (In thousands)
Transactional and maintenance               $      155,637       $  127,795     $           27,842                     22 %
Professional services                               53,474           50,083                  3,391                      7 %
License                                             32,811           28,472                  4,339                     15 %

Total                                       $      241,922       $  206,350                 35,572                     17 %

Applications segment revenues increased $35.6 million primarily due to a $26.4 million increase in our mobility solutions, a $4.5 million increase in our collections & recovery solutions, and a $4.0 million increase in our customer management solutions.

The increase in mobility solutions was due to our Adeptra acquisition in September 2012. The increase in collections & recovery solutions was primarily attributable to our CR software acquisition in November 2012, partially offset by a decrease in revenues generated from our Debt Manager product. The increase in customer management solutions was due to increased license and services revenues.

Scores



                                                Six Months Ended March 31,
                                                                                                           Period-to-Period
                                                                                    Period-to-Period          Percentage
                                                 2013                2012                Change                 Change
                                                      (In thousands)                 (In thousands)
Transactional and maintenance                $      84,643       $      85,833     $           (1,190 )                   (1 )%
Professional services                                2,527                 809                  1,718                    212 %
License                                                339                 325                     14                      4 %

Total                                        $      87,509       $      86,967                    542                      1 %

Scores segment revenues increased $0.5 million due to an increase of $1.3 million in our myFICO business-to-consumer services revenue partially offset by a decrease of $0.8 million in our business-to-business Scores revenue. The increase in business-to-consumer services was primarily attributable to stronger direct sales generated from the myFICO.com website partially offset by a decline in royalties derived from scores sold indirectly to consumers through credit reporting agencies. The decrease in our business-to-business Scores was primarily attributable to a decrease in PreScore revenue.

During the six months ended March 31, 2013 and 2012, revenues generated from our agreements with Equifax, TransUnion and Experian collectively accounted for approximately 15% and 18%, respectively, of our total revenues, including revenues from these customers that are recorded in our other segments.


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Tools



                                                Six Months Ended March 31,
                                                                                                           Period-to-Period
                                                                                    Period-to-Period          Percentage
                                                 2013                2012                Change                 Change
                                                      (In thousands)                 (In thousands)
Transactional and maintenance                $      16,057       $      15,398     $              659                      4 %
Professional services                               10,445               8,262                  2,183                     26 %
License                                             13,412              12,893                    519                      4 %

Total                                        $      39,914       $      36,553                  3,361                      9 %

Tools segment revenues increased $3.4 million primarily due to increased services revenue related to our Blaze and third-party products in our rules management tools.

Operating Expenses and Other Income (Expense)

The following table sets forth certain summary information related to our
statements of income and comprehensive income for the fiscal periods indicated:



                                                         Quarter Ended March 31,            Percentage of Revenues
                                                                                                                                                      Period-to-Period
                                                                                                                              Period-to-Period           Percentage
                                                           2013             2012           2013                2012                Change                  Change
                                                          (In thousands, except                                                (In thousands,
. . .
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