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FICO > SEC Filings for FICO > Form 10-Q on 28-Jan-2014All Recent SEC Filings

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Form 10-Q for FAIR ISAAC CORP


28-Jan-2014

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 2014.

OVERVIEW

We provide products and services that enable businesses to automate, improve and connect decisions across the 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 power hundreds of billions of customer decisions each year. We help thousands of companies in over 90 countries use our decision management technology to target and acquire customers more efficiently, increase customer value, 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, healthcare organizations and public 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 consumer credit risk, empowering them to manage their financial health. Most of our solutions address customer engagement, including customer acquisition, customer servicing and management, and customer protection. We also help businesses improve noncustomer decisions such as transaction and claims processing. 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.

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 $76.4 million for the quarter ended December 31, 2013, an increase of 2% from $75.3 million from the quarter ended December 31, 2012, representing 41% and 40% of total consolidated revenues in each of these quarters. A significant portion of our revenues are derived from the sale of products and services within the banking (including consumer credit) industry, and 75% and 72% of our revenues were derived from within this industry during the quarters ended December 31, 2013 and 2012, respectively. In addition, we derive a significant share of revenue from transactional or unit-based software license fees, transactional fees derived under scoring, network service or internal hosted software arrangements, annual software maintenance fees and annual license fees under long-term software license arrangements. Arrangements with transactional or unit-based pricing accounted for approximately 70% and 68% of our revenues during the quarters ended December 31, 2013 and 2012, respectively.


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We continue to invest in our franchise technologies, including in the areas of cloud computing and software as a service ("SaaS"). The expansion of cloud-based solutions will enable us to deliver solutions more efficiently to our customers and expand our market opportunities further into markets outside the banking industry sector. We also continue to enhance shareholder value by returning cash to shareholders through our stock repurchase program. During the quarter ended December 31, 2013, we repurchased approximately 0.4 million shares for a total value of $25.0 million.

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.

Bookings Trend Analysis



                                                                                Number of
                                                                                 Bookings        Weighted-
                                                               Bookings          over $1          Average
                                           Bookings             Yield*           Million            Term
                                         (In millions)                                            (Months)
Quarter Ended December 31, 2013         $          84.2               24 %              16               23
Quarter Ended December 31, 2012         $          82.0               33 %              10               28

* Bookings yield represents the percentage of revenue recognized from bookings for the periods indicated.


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Transactional and maintenance bookings were 29% and 33% of total bookings for the quarters ended December 31, 2013 and 2012, respectively. Professional services bookings were 55% and 34% of total bookings for the quarters ended December 31, 2013 and 2012, respectively. License bookings were 16% and 33% of total bookings for the quarters ended December 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 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.

                             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:



                                                                                                                                           Period-to-Period
                                          Quarter Ended December 31,             Percentage of Revenues           Period-to-Period            Percentange
Segment                                     2013                2012            2013               2012                Change                   Change
                                                (In thousands)                                                     (In thousands)
Applications                           $      111,916        $  124,707              61 %               66 %      $         (12,791 )                    (10 )%
Scores                                         47,180            43,447              25 %               23 %                  3,733                        9 %
Tools                                          25,247            21,866              14 %               11 %                  3,381                       15 %

Total revenue                          $      184,343        $  190,020             100 %              100 %                 (5,677 )                     (3 )%


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

Applications



                                                                                                     Period-to-
                                                                                                       Period
                                         Quarter Ended December 31,            Period-to-            Percentage
                                           2013                2012           Period Change            Change
                                               (In thousands)                (In thousands)
Transactional and maintenance         $       77,779        $   79,625       $        (1,846 )                (2 )%
Professional services                         26,787            26,159                   628                   2 %
License                                        7,350            18,923               (11,573 )               (61 )%

Total                                 $      111,916        $  124,707               (12,791 )               (10 )%

Applications segment revenues decreased $12.8 million primarily due to a $7.7 million decrease in our marketing solutions, $5.0 million decrease in our fraud solutions and a $2.7 million decrease in our customer management solutions, partially offset by a $3.0 million increase in our mobility solutions.

The decrease in marketing solutions revenues was primarily attributable to the early termination of a large customer in December 2012. The decrease in fraud solutions revenues was primarily attributable to a decrease in software and transactional revenues, partially offset by an increase in service revenues. The decrease in customer management solutions was primarily attributable to a decrease in software revenues. The increase in mobility solutions revenues was primarily attributable to an increase in transactional revenues.

Scores



                                                                                                      Period-to-
                                                                                                        Period
                                         Quarter Ended December 31,             Period-to-            Percenage
                                         2013                 2012             Period Change            Change
                                               (In thousands)                 (In thousands)
Transactional and maintenance        $      43,318        $      42,437       $           881                   2 %
Professional services                          589                  903                  (314 )               (35 )%

License 3,273 107 3,166 2,959 %

Total $ 47,180 $ 43,447 3,733 9 %

Scores segment revenues increased $3.7 million due to an increase of $1.7 million in our business-to-business Scores revenue and an increase of $2.0 million in our myFICO business-to-consumer services revenue. The increase in our business-to-business Scores was primarily attributable to increased software revenue related to our Global FICO® Score, partially offset by a decrease in PreScore 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.

During the quarters ended December 31, 2013 and 2012, revenues generated from our agreements with Equifax, TransUnion and Experian collectively accounted for approximately 16% and 15%, 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
                                          Quarter Ended December 31,             Period-to-           Percentage
                                          2013                 2012             Period Change           Change
                                                (In thousands)                 (In thousands)
Transactional and maintenance         $       8,558        $       7,836       $           722                  9 %
Professional services                         6,910                5,275                 1,635                 31 %
License                                       9,779                8,755                 1,024                 12 %

Total                                 $      25,247        $      21,866                 3,381                 15 %

Tools segment revenues increased $3.4 million primarily attributable to an increase in sales of FICO® Decision Optimizer in our Optimization tools.

Operating Expenses and Other Expense

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



                                                                                                                                                             Period-to-
                                                                                                                                                               Period
                                                            Quarter Ended December 31,            Percentage of Revenues               Period-to-            Percentage
                                                              2013                2012           2013                2012             Period Change            Change
                                                               (In thousands, except                                                 (In thousands,
                                                                    employees)                                                      except employees)
Revenues                                                  $     184,343        $  190,020            100 %               100 %     $            (5,677 )              (3 )%
Operating expenses:
Cost of revenues                                                 57,319            56,148             31 %                29 %                   1,171                 2 %
Research and development                                         18,092            14,552             10 %                 8 %                   3,540                24 %
Selling, general and administrative                              66,989            69,665             36 %                37 %                  (2,676 )              (4 )%
Amortization of intangible assets                                 3,013             3,372              2 %                 2 %                    (359 )             (11 )%
Restructuring and acquisition-related                             3,660             3,289              2 %                 2 %                     371                11 %

Total operating expenses                                        149,073           147,026             81 %                78 %                   2,047                 1 %

Operating income                                                 35,270            42,994             19 %                22 %                  (7,724 )             (18 )%
Interest income                                                       6                21             -  %                -  %                     (15 )             (71 )%
Interest expense                                                 (7,132 )          (7,880 )           (3 )%               (4 )%                    748                (9 )%
Other expense, net                                                 (961 )             (92 )           (1 )%               -  %                    (869 )             945 %

Income before income taxes                                       27,183            35,043             15 %                18 %                  (7,860 )             (22 )%
Provision for income taxes                                       10,206            11,622              6 %                 6 %                  (1,416 )             (12 )%

Net income                                                $      16,977        $   23,421              9 %                12 %                  (6,444 )             (28 )%

Number of employees at quarter end                                2,425             2,404                                                           21                 1 %

Cost of Revenues

Cost of revenues consists primarily of employee salaries and benefits for personnel directly involved in developing, installing and supporting revenue products; travel costs; overhead costs; costs of computer service bureaus; internal network hosting costs; amounts payable to credit reporting agencies for scores; software costs; and expenses related to our business-to-consumer services.


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Cost of revenues as a percentage of revenues increased to 31% for the quarter ended December 31, 2013 from 29% for the quarter ended December 31, 2012. The $1.2 million increase was primarily due to a $0.8 million increase in travel costs, driven by increased services revenue requiring travel to client locations.

Over the next several quarters, we expect cost of revenues as a percentage of revenues will be consistent with or slightly higher than those incurred during the quarter ended December 31, 2013.

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 and Tools products.

Research and development expenses as a percentage of revenues increased to 10% for the quarter ended December 31, 2013 from 8% for the quarter ended December 31, 2012. The $3.5 million increase was mainly due to a $3.2 million increase in personnel and labor costs, attributable to our continued investment in the areas of cloud computing and SaaS.

Over the next several quarters, we expect that research and development expenditures as a percentage of revenues will be consistent with or slightly higher than those incurred during the quarter ended December 31, 2013.

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.

Selling, general and administrative expenses as a percentage of revenues decreased to 36% for the quarter ended December 31, 2013 from 37% for the quarter ended December 31, 2012. The $2.7 million decrease was primarily attributable to a $3.6 million decrease in labor and personnel costs, partially offset by a $0.9 million increase in marketing expenses. The decrease in labor and personnel costs was primarily due to FICO shifting resources to research and development efforts in the areas of cloud computing and SaaS. The increase in marketing expenses was primarily due to increased efforts to market our cloud initiative.

Over the next several quarters, we expect that selling, general and administrative expenses as a percentage of revenues will be consistent with or slightly higher than those incurred during the quarter ended December 31, 2013.

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.

The quarter over quarter decrease of $0.4 million in amortization expense was attributable to certain intangible assets associated with our Dash and London Bridge acquisitions becoming fully amortized in January 2013 and May 2013, respectively, partially offset by the addition of intangible assets associated with our acquisitions of CR Software and Infoglide in fiscal 2013.

Over the next several quarters we expect that amortization expense will be consistent with the amortization expense we recorded during the quarter ended December 31, 2013.

Restructuring and Acquisition-related

During the quarter ended December 31, 2013, we incurred $3.7 million in severance charges due to the elimination of 83 positions throughout the company. Cash payments for all the severance costs will be paid by the end of the second quarter of our fiscal 2014. There were no acquisition-related charges during the period.


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During the quarter ended December 31, 2012, we incurred net charges totaling $2.5 million consisting of severance costs and costs for vacating excess leased space. Cash payments for all the severance costs were paid during fiscal 2013. Cash payments for all the facilities charges will be paid by the end of fiscal 2014. We also incurred $0.8 million in acquisition-related cost during the period, mainly associated with our CR Software acquisition.

Interest Expense

Interest expense includes interest on the Senior Notes issued in May 2008 and July 2010, as well as interest and credit facility fees on the revolving line of credit.

The quarter over quarter decrease in interest expense of $0.7 million was attributable to the $49.0 million principal payment in May 2013 on the Senior . . .

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