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

Show all filings for FAIR ISAAC CORP

Form 10-Q for FAIR ISAAC CORP


28-Jul-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.
We derive a significant portion of our revenues from clients outside the United States. International revenues accounted for 41% and 39% of total consolidated revenues for the quarters ended June 30, 2014 and 2013, respectively, and 40% and 39% of total consolidated revenues for the nine months ended June 30, 2014 and 2013, respectively. A significant portion of our revenues are derived from the sale of products and services within the banking (including consumer credit) industry, and 72% and 73% of our revenues were derived from within this industry during the quarters ended June 30, 2014 and 2013, respectively, and 74% and 73% of our revenues were derived from within this industry during the nine months ended June 30, 2014 and 2013, 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 67% and 70% of our revenues during the quarters ended June 30, 2014 and 2013, respectively. Arrangements with


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transactional or unit-based pricing accounted for approximately 69% and 70% of our revenues during the nine months ended June 30, 2014 and 2013, respectively.

We continue to invest in our franchise technologies, including expansion to the areas of cloud computing and software as a service ("SaaS"). The expansion into cloud-based solutions will enable us to deliver solutions more efficiently to our customers and develop market opportunities 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 and nine months ended June 30, 2014, we repurchased approximately 1.6 million shares for a total value of $94.0 million and 2.8 million shares for a total value of $159.0 million, respectively.
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

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                                                                Number of
                                                                 Bookings    Weighted-
                                                    Bookings     over $1      Average
                                    Bookings       Yield (1)     Million      Term (2)
                                 (In millions)                                (Months)
Quarter Ended June 30, 2014     $          84.5        18 %            14           28
Quarter Ended June 30, 2013     $          70.2        28 %            17           23
Nine Months Ended June 30, 2014 $         276.5        29 %            51           NM
Nine Months Ended June 30, 2013 $         236.9        36 %            43           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 24% and 28% of total bookings for the quarters ended June 30, 2014 and 2013, respectively. Professional services bookings were 47% and 43% of total bookings for the quarters ended June 30, 2014 and 2013, respectively. License bookings were 29% and 29% of total bookings for the quarters ended June 30, 2014 and 2013, respectively.
Transactional and maintenance bookings were 29% and 36% of total bookings for the nine months ended June 30, 2014 and 2013, respectively. Professional services bookings were 46% and 40% of total bookings for the nine months ended June 30, 2014 and 2013, respectively. License bookings were 25% and 24% of total bookings for the nine months ended June 30, 2014 and 2013, 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 quarters and nine months ended June 30, 2014 and 2013:


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                                                                                                             Period-to-Period
                     Quarter Ended June 30,              Percentage of Revenues         Period-to-Period        Percentage
Segment               2014               2013             2014              2013             Change               Change
                         (In thousands)                                                  (In thousands)
Applications   $     129,856         $   114,983             66 %               63 %   $        14,873              13  %
Scores                45,330              47,152             23 %               25 %            (1,822 )            (4 )%
Tools                 22,424              21,637             11 %               12 %               787               4  %
Total          $     197,610         $   183,772            100 %              100 %            13,838               8  %
                                                                                                             Period-to-Period
                   Nine Months Ended June 30,            Percentage of Revenues         Period-to-Period        Percentage
Segment               2014               2013             2014              2013             Change               Change
                         (In thousands)                                                  (In thousands)
Applications   $     357,382         $   356,905             63 %               65 %   $           477               -  %
Scores               140,368             134,661             25 %               24 %             5,707               4  %
Tools                 69,665              61,551             12 %               11 %             8,114              13  %

Total          $     567,415         $   553,117            100 %              100 %            14,298               3  %


Quarter Ended June 30, 2014 Compared to Quarter Ended June 30, 2013
Applications
                                                                                                Period-to-
                                                                                                  Period
                                           Quarter Ended June 30,            Period-to-         Percentage
                                            2014               2013         Period Change         Change
                                               (In thousands)              (In thousands)
Transactional and maintenance        $      78,915         $   75,537     $         3,378             4 %
Professional services                       31,898             26,230               5,668            22 %
License                                     19,043             13,216               5,827            44 %
Total                                $     129,856         $  114,983              14,873            13 %

Applications segment revenues increased $14.9 million due to a $5.4 million increase in our fraud solutions, a $3.2 million increase in our marketing solutions, a $2.4 million increase in our mobility solutions, a $2.1 million increase in our originations solutions, and a $1.8 million increase in our other solutions.
The increase in fraud solutions revenues was primarily attributable to an increase in software and service revenues. The increase in marketing solutions revenues was primarily attributable to an increase in license revenue, driven by a recently signed large deal to develop customized software solutions for a new customer. The increase in mobility solutions revenues was primarily attributable to an increase in transactional revenues as a result of our growth in the mobile communication space. The increase in originations solutions revenues was primarily attributable to an increase in service revenue.

Scores
                                                                                          Period-to-
                                                                                            Period
                                        Quarter Ended June 30,          Period-to-        Percentage
                                          2014            2013        Period Change         Change
                                            (In thousands)            (In thousands)
Transactional and maintenance        $     44,077     $   45,915     $       (1,838 )          (4 )%
Professional services                         801            806                 (5 )          (1 )%
License                                       452            431                 21             5  %
Total                                $     45,330     $   47,152             (1,822 )          (4 )%

Scores segment revenues decreased $1.8 million due to a decrease of $2.4 million in our business-to-business Scores revenue, partially offset by an increase of $0.6 million in our business-to-consumer services revenue. The decrease in our business-to-


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business Scores was primarily attributable to a mix shift toward volumes with lower price points. 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 June 30, 2014 and 2013, revenues generated from our agreements with Equifax, TransUnion and Experian collectively accounted for approximately 14% and 17%, respectively, of our total revenues, including revenues from these customers that are recorded in our other segments.

Tools

                                                                                          Period-to-
                                                                                            Period
                                        Quarter Ended June 30,          Period-to-        Percentage
                                          2014            2013        Period Change         Change
                                            (In thousands)            (In thousands)
Transactional and maintenance        $      9,262     $    7,970     $        1,292            16  %
Professional services                       5,823          5,270                553            10  %
License                                     7,339          8,397             (1,058 )         (13 )%
Total                                $     22,424     $   21,637                787             4  %

Tools segment revenues increased $0.8 million primarily attributable to an increase in transactional and maintenance revenues, partially offset by a decrease in license revenue.

Nine Months Ended June 30, 2014 Compared to Nine Months Ended June 30, 2013

Applications

                                                                                            Period-to-
                                                                                              Period
                                       Nine Months Ended June 30,         Period-to-        Percentage
                                           2014             2013        Period Change         Change
                                             (In thousands)             (In thousands)
Transactional and maintenance        $      233,592     $  231,174     $        2,418             1  %
Professional services                        87,058         79,704              7,354             9  %
License                                      36,732         46,027             (9,295 )         (20 )%
Total                                $      357,382     $  356,905                477             -  %

Applications segment revenues increased $0.5 million due to an $8.1 million increase in our mobility solutions, a $5.3 million increase in our collections & recovery solutions and a $0.6 million increase in our other solutions, partially offset by an $8.5 million decrease in our fraud solutions and a $5.0 million decrease in our marketing solutions.
The increase in mobility solutions revenues was primarily attributable to an increase in transactional revenues as a result of our growth in the mobile communication space. The increase in collections & recovery solutions revenues was primarily attributable to our CR Software acquisition in November 2012, partially offset by a decrease in revenues generated from our FICO® Debt Manager™ product. The decrease in fraud solutions revenues was primarily attributable to a decrease in software revenue, largely driven by a couple of multi-year license transactions during the nine months ended June 30, 2013. The decrease in marketing solutions revenues was primarily attributable to the early termination of a large customer in December 2012, partially offset by a recently signed large deal to develop customized software solutions for a new customer. Scores


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                                                                                            Period-to-
                                                                                              Period
                                       Nine Months Ended June 30,         Period-to-        Percentage
                                           2014             2013        Period Change         Change
                                             (In thousands)             (In thousands)
Transactional and maintenance        $      133,955     $  130,558     $        3,397             3  %
Professional services                         2,167          3,333             (1,166 )         (35 )%
License                                       4,246            770              3,476           451  %
Total                                $      140,368     $  134,661              5,707             4  %

Scores segment revenues increased $5.7 million due to an increase of $1.8 million in our business-to-business Scores revenue, and an increase of $3.9 million in our 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. 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 nine months ended June 30, 2014 and 2013, revenues generated from our agreements with Equifax, TransUnion and Experian collectively accounted for approximately 15% and 16%, respectively, of our total revenues, including revenues from these customers that are recorded in our other segments.

Tools

                                                                                             Period-to-
                                                                                               Period
                                       Nine Months Ended June 30,         Period-to-         Percentage
                                           2014             2013         Period Change         Change
                                             (In thousands)             (In thousands)
Transactional and maintenance        $       26,731     $   24,027     $         2,704            11 %
Professional services                        18,202         15,715               2,487            16 %
License                                      24,732         21,809               2,923            13 %
Total                                $       69,665     $   61,551               8,114            13 %

Tools segment revenues increased $8.1 million primarily due to an increase in optimization tools, driven by increased software sales of FICO® Decision Optimizer, as well as increased license and maintenance revenues in models tools.

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 and nine months ended June 30, 2014 and 2013:


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                                                                                                                    Period-to-
                                                                                                                      Period
                         Quarter Ended June 30,             Percentage of Revenues              Period-to-          Percentage
                          2014            2013             2014               2013            Period Change           Change
                         (In thousands, except                                                (In thousands,
                               employees)                                                   except employees)
Revenues             $    197,610     $   183,772            100  %             100  %     $           13,838              8  %
Operating expenses:
Cost of revenues           62,752          57,655             32  %              32  %                  5,097              9  %
Research and
development                23,240          18,570             12  %              10  %                  4,670             25  %
Selling, general and
administrative             71,557          68,665             36  %              37  %                  2,892              4  %
Amortization of
intangible assets           3,019           3,477              1  %               2  %                   (458 )          (13 )%
Restructuring and
acquisition-related           621             197              -  %               -  %                    424            215  %
Total operating
expenses                  161,189         148,564             81  %              81  %                 12,625              8  %
Operating income           36,421          35,208             19  %              19  %                  1,213              3  %
Interest income                13              15              -                  -                        (2 )          (13 )%
. . .
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