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Item 2. Management’s Discussion and Analysis

2021-01-28 compared with 2020-07-29 · 187 added, 309 removed, 288 unchanged (63% of the section changed)

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(iii) statements of assumptions underlying such statements, including those related to economic conditions;

(iv) statements regarding business relationships with vendors, customers or collaborators, including the proportion of revenues generated from international as opposed to domestic customers;

and (v) statements regarding products, their characteristics, performance, sales potential or effect in the hands of customers.

Words such as “believes,” “anticipates,” “expects,” “intends,” “targeted,” “should,” “potential,” “goals,” “strategy,” “outlook,” and similar expressions are intended to identify forward-looking statements, but are not the exclusive means of identifying such statements.

(iv) statements regarding results of business combinations;

(v) statements regarding business relationships with vendors, customers or collaborators, including the proportion of revenues generated from international as opposed to domestic customers;

and (vi) statements regarding products, their characteristics, performance, sales potential or effect in the hands of customers.

Words such as “believes,” “anticipates,” “expects,” “intends,” “targeted,” “should,” “potential,” “goals,” “strategy,” “outlook,” “plan,” “estimated,” “will,” variations of these terms and similar expressions are intended to identify forward-looking statements, but are not the exclusive means of identifying such statements.

Forward-looking statements involve risks and uncertainties that may cause actual results to differ materially from those in such statements.

Factors that could cause actual results to differ from those discussed in the forward-looking statements include, but are not limited to, those described in Part II, Item 1A “ Risk Factors ” of this Quarterly Report on Form 10-Q, including the impact of COVID-19 on macroeconomic conditions and the Company’s business, operations and personnel.

Factors that could cause actual results to differ from those discussed in the forward-looking statements include, but are not limited to, those described in Part II, Item 1A “ Risk Factors ” of this Quarterly Report on Form 10-Q (including the impact of COVID-19 on macroeconomic conditions and our business, operations and personnel).

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.

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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 Current Reports on Form 8-K to be filed by us in fiscal 2020 .

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 Quarterly Reports on Form 10-Q and Current Reports on Form 8-K to be filed by us in fiscal 2021.

We use analytics to help businesses automate, improve and connect decisions across their enterprise — an approach we commonly refer to as decision management.

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We help thousands of companies in over 100 countries use our decision management technology to target and acquire customers more efficiently, increase customer value, detect and reduce fraud and credit losses, lower operating expenses, and enter new markets more profitably.

Most leading banks and credit card issuers rely on our solutions, as do insurers, retailers, telecommunications providers, pharmaceutical companies, healthcare organizations, public agencies and organizations in other industries.

Most leading banks and credit card issuers rely on our solutions, as do insurers, retailers, telecommunications providers, automotive companies, pharmaceutical companies, healthcare organizations, public agencies and organizations in other industries.

We also serve consumers through online services that enable people to purchase and understand their FICO ® Scores, the standard measure of consumer credit risk in the U.S., and empower them to manage their financial health.

Most of our solutions address customer engagement, including customer acquisition, customer onboarding, customer servicing and management, and customer protection.

We also help businesses improve non-customer decisions such as streamlining transaction and claims processing, optimizing logistics, and identifying and quantifying security risk.

We also help businesses improve non-customer decisions such as streamlining transaction and claims processing, and optimizing logistics.

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 U.S.

International revenues accounted for 31% and 35% of total consolidated revenues for the quarters ended June 30, 2020 and 2019 , respectively, and 32% and 34% of total consolidated revenues for the nine months ended June 30, 2020 and 2019 , respectively.

A significant portion of our revenues are derived from the sale of products and services within the banking (including consumer credit) industry, and 86% and 88% of our revenues were derived from within this industry during the quarters ended June 30, 2020 and 2019 , respectively, and 86% and 87% of our revenues were derived from within this industry during the nine months ended June 30, 2020 and 2019 , respectively.

A significant portion of our revenues are derived from the sale of products and services within the banking (including consumer credit) industry, and 85% and 84% of our revenues were derived from within this industry during the quarters ended December 31, 2020 and 2019, respectively.

In addition, we derive a significant share of revenues from transactional or unit-based software license fees, transactional fees derived under credit scoring, data processing, data management and SaaS subscription services arrangements, and annual software maintenance fees.

Arrangements with transactional or unit-based pricing accounted for 79% and 72% of our revenues during the quarters ended June 30, 2020 and 2019 , respectively.

Arrangements with transactional or unit-based pricing accounted for 77% and 74% of our revenues during the nine months ended June 30, 2020 and 2019 , respectively.

Revenue for the quarter ended June 30, 2020 was $313.7 million , slightly down from $314.2 for the quarter ended June 30, 2019 .

Revenue increased 8% to $920.2 million during the nine months ended June 30, 2020 from $854.7 million during the nine months ended June 30, 2019 .

Arrangements with transactional or unit-based pricing accounted for 81% and 74% of our revenues during the quarters ended December 31, 2020 and 2019, respectively.

We derive a significant portion of our revenues from clients outside the U.S.

International revenues accounted for 28% and 33% of total consolidated revenues for the quarters ended December 31, 2020 and 2019, respectively.

Revenue increased 5% to $312.4 million during the quarter ended December 31, 2020 from $298.5 million for the quarter ended December 31, 2019.

We continue to drive growth in our Scores segment.

Scores revenue increased 14% to $131.6 million during the quarter ended June 30, 2020 from $115.1 million during the quarter ended June 30, 2019 , and 23% to $375.8 million during the nine months ended June 30, 2020 from $305.2 million during the nine months ended June 30, 2019 .

Scores operating income increased 11% to $110.2 million during the quarter ended June 30, 2020 from $99.3 million during the quarter ended June 30, 2019 , and 24% to $321.1 million during the nine months ended June 30, 2020 from $259.7 million during the nine months ended June 30, 2019 .

For our Applications and Decision Management Software segments, cloud business continues to grow as we pursue our cloud-first strategy.

Cloud revenues increased 11% to $76.6 million during the quarter ended June 30, 2020 from $69.3 million during the quarter ended June 30, 2019 , and 12% to $224.0 million during the nine months ended June 30, 2020 from $199.5 million during the nine months ended June 30, 2019 .

Operating income decreased 3% to $82.9 million during the quarter ended June 30, 2020 from $85.7 million during the quarter ended June 30, 2019 , and net earnings of $64.1 million for the quarter ended June 30, 2020 was consistent with the quarter ended June 30, 2019 .

Operating income increased 15% to $210.5 million during the nine months ended June 30, 2020 from $183.3 million during the nine months ended June 30, 2019 , and net earnings increased 29% to $177.3 million from $137.5 million , driven by higher operating income as well as higher excess tax benefits related to stock-based compensation during the nine months ended June 30, 2020.

Scores revenue increased 26% to $144.7 million during the quarter ended December 31, 2020 from $115.1 million during the quarter ended December 31, 2019.

Scores operating income increased 26% to $123.0 million during the quarter ended December 31, 2020 from $97.4 million during the quarter ended December 31, 2019.

For our Applications and Decision Management Software segments, revenue decreased 9% to $167.8 million during the quarter ended December 31, 2020 from $183.4 million during the quarter ended December 31, 2019.

The decrease was largely attributable to the shift in the timing of revenue recognition on our term license subscription sales , as described below;

as well as a reduction in the number and size of term license deals signed or renewed during the quarter ended December 31, 2020.

During fiscal 2020, we changed our practice of selling term software licenses with separate license and maintenance components to a single software subscription contract with license and maintenance bundled.

This transition was substantially completed by the end of the first quarter of our fiscal 2021.

This transition shifts the timing of our revenue recognition on these subscription sales, resulting in less revenue recognized upfront and more revenue recognized over the term of these subscriptions.

As a result, we expect a negative impact to our revenue recognized from term software licenses throughout the rest of our fiscal 2021.

This does not change total revenue recognized over the life of a contract.

In addition, this change does not negatively impact our cash flows.

Operating income increased 83% to $94.7 million during the quarter ended December 31, 2020 from $51.9 million during the quarter ended December 31, 2019.

Net income increased 57% to $86.5 million during the quarter ended December 31, 2020 from $54.9 million during the quarter ended December 31, 2019, primarily driven by higher operating income during the quarter ended December 31, 2020, partially offset by lower excess tax benefits related to stock-based compensation.

During the first quarter of our fiscal 2021, we continued to advance our cloud-enabled, platform-based software strategy by exiting less strategic areas of our business in order to facilitate incremental investment in higher value, more strategic areas.

We sold all assets related to our cyber risk score operations in October 2020.

In addition, we sold certain assets related to our Applications and Decision Management Software operations to an affiliated joint venture in China in December 2020.

The net gain realized from both transactions was deemed immaterial to our condensed consolidated financial statements.

We continue to enhance stockholder value by returning cash to stockholders through our stock repurchase program.

During the quarter and nine months ended June 30, 2020 , we repurchased approximately 0.2 million shares at a total repurchase price of $54.0 million and 0.6 million shares at a total repurchase price of $210.0 million , respectively.

As of June 30, 2020 , we had $10.3 million remaining under our then-current stock repurchase program.

During the quarter ended December 31, 2020, we repurchased approximately 101,000 shares at a total repurchase price of $50.0 million.

As of December 31, 2020, we had $174.8 million remaining under our current stock repurchase program.

COVID-19 Update

In March 2020, the World Health Organization declared the outbreak of COVID-19 a global pandemic, which has spread throughout the U.S.

and the world.

The COVID-19 pandemic has resulted in authorities implementing numerous measures to contain the virus, including quarantines, shelter-in-place orders, travel bans and restrictions, and business limitations and shutdowns.

Our focus remains on promoting employee health and safety, serving our customers and ensuring business continuity.

Since March 2020, our employees have been instructed to work from home in each country where we operate to support their health and well-being as well as for our customers, partners and communities.

We have also substantially reduced employee travel to only essential business needs.

We cannot predict when or how we will begin to lift the actions put in place, but as of the date of this filing, we do not believe our work-from-home protocol has had a material adverse impact on our internal controls, financial reporting systems or our operations.

Our operational flexibility and strong balance sheet allowed us to successfully manage through the initial impact of COVID-19 while protecting our cash flow and liquidity.

However, certain areas of our business have been adversely impacted as a result of the pandemic’s global economic impact.

For example, COVID-19 has been adversely affecting certain purchasing decisions by our customers in our Applications and Decision Management Software segments.

For our Scores segment, we have seen a decline in auto and unsecured originations volumes, but an increase in mortgage volume during the quarter ended June 30, 2020 due to strong refinancing activities boosted by low interest rates.

Additionally, we have granted and may continue to grant extended payment terms to a small number of customers as a result of COVID-19.

We have not and do not plan to modify our customer agreements in a manner that would materially impact our financial condition or results of operations.

Finally, contrary to our original expectations, a decrease in sales-related travel activity has not materially affected our ability to consummate sales.

We continue to manage our costs by limiting the addition of new employees and third-party contracted services, and substantially reducing employee travel and other discretionary spending.

To the extent the business disruption continues for an extended period, additional cost management actions will be considered and may become necessary.

Any future asset impairment charges, increase in allowance for doubtful accounts, or restructuring charges will be dependent on the severity and duration of the pandemic.

While we have not incurred significant disruptions thus far from the COVID-19 outbreak, due to numerous uncertainties, including the severity and duration of the pandemic, actions that may be taken by governmental authorities, the impact on the business of our clients, and other factors, we are unable to accurately predict the impact COVID-19 will have on our results of operations, financial condition, liquidity and cash flows.

For more information, see Part II, Item 1A “Risk Factors” in this Form 10-Q.

Management uses bookings as an indicator of our business performance.

As the COVID-19 pandemic persists, our focus remains on promoting employee health and safety, serving our customers and ensuring business continuity.

For a discussion of the variety of measures we have taken, as well as the impacts on and risks to our business from COVID-19, please refer to “COVID-19 Update” included in Item 7 Management’s Discussion and Analysis of Financial Condition and Results of Operations and certain risk factors included in Item 1A Risk Factors in our Annual Report on Form 10-K for the fiscal year ended September 30, 2020;

and the information presented below in Results of Operations in Item 2 of this Quarterly Report.

Management regards the volume of bookings achieved as an important indicator of future revenues, but they are not comparable to, nor a substitute for, an analysis of our revenues.

Bookings represent contracts signed in the current reporting period that generate current and future revenue streams.

We consider contract terms, knowledge of the marketplace and experience with our customers, among other factors, when determining the estimated value of contract bookings.

While we disclose estimated revenue expected to be recognized in the future related to unsatisfied performance obligations in Note 12 to the accompanying condensed consolidated financial statements, we believe bookings amount is still a meaningful measure of our business as it includes estimated revenues omitted from Note 12, such as usage-based royalties derived from our software licenses, among others.

Bookings calculations have varying degrees of certainty depending on the revenue type and individual contract terms.

Our revenue types are transactional and maintenance, professional services and license as defined in Revenue Recognition in the Critical Accounting Policy and Estimates.

Our estimate of bookings is as of the end of the period in which a contract is signed, and we do not update initial booking estimates in future periods for changes between estimated and actual results.

We estimate bookings as of the end of the period in which a contract is signed, and initial booking estimates are not updated in future periods for changes between estimated and actual results.

Our calculations have varying degrees of certainty depending on the revenue type and individual contract terms.

They are subject to a number of risks and uncertainties concerning timing and contingencies affecting product delivery and performance, and estimates take into consideration contract terms, knowledge of the marketplace and experience with our customers, among other factors.

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.

Although many of our contracts contain non-cancelable terms, most of our bookings are transactional or service-related that depend upon certain 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.

The following paragraphs discuss the key assumptions used to calculate bookings and the susceptibility of these assumptions to variability for each revenue type, as defined in Revenue Recognition in the Critical Accounting Policies and Estimates.

Transactional and Maintenance Bookings

We calculate transactional bookings as the total estimated volume of transactions or number of accounts under contract, multiplied by the contractual rate.

Transactional contracts generally span multiple years and require us to make estimates about future transaction volumes or number of active accounts.

Transactional contracts generally span multiple years and require estimates of 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;

This variability is primarily caused by the economic trends in our customers’ industries;

individual performance of our customers relative to their competitors;

Regulatory and other factors that affect the business environment in which our customers operate.

and regulatory and other factors that affect the business environment in which our customers operate.

We calculate maintenance bookings directly from the terms stated in the contract.

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Estimated bookings may differ from actual results primarily due to differences in the actual number of hours incurred.

These differences typically result from customer decisions to alter the mix of FICO and customer services resources used to complete a project.

License Bookings

On-premises licenses are sold on a perpetual or term basis.

When the fee is in the form of a fixed consideration, including the guaranteed minimum in usage-based royalty, the fixed amount is recorded as a license booking.

The variable amount, including usage-based royalty not subject to the guaranteed minimum or earned in excess of the minimum amount is recorded as a transactional and maintenance booking.

Please refer to Transactional and Maintenance Bookings above on how we develop estimates for such bookings.

Licenses that are sold on a term or perpetual basis when bookings generally equal the fixed amount (including guaranteed minimums) stated in the contract.

Bookings Trend Analysis

(In millions)

Quarter Ended June 30, 2020

Quarter Ended June 30, 2019

Nine Months Ended June 30, 2020

Nine Months Ended June 30, 2019

Bookings Bookings

Yield (1) Number of

Million Weighted-

(In millions) (Months)

Quarter Ended December 31, 2020 $ 68.1 13 % 11 36

Quarter Ended December 31, 2019 $ 112.1 14 % 25 39

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

(2) Weighted-average term of bookings measures the average term over which bookings are expected to be recognized as revenue.

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 49% and 48% of total bookings for the quarters ended June 30, 2020 and 2019 , respectively.

Professional services bookings were 39% and 37% of total bookings for the quarters ended June 30, 2020 and 2019 , respectively.

License bookings were 12% and 15% of total bookings for the quarters ended June 30, 2020 and 2019 , respectively.

Transactional and maintenance bookings were 44% and 46% of total bookings for the nine months ended June 30, 2020 and 2019 , respectively.

Professional services bookings were 38% and 40% of total bookings for the nine months ended June 30, 2020 and 2019 , respectively.

License bookings were 18% and 14% of total bookings for the nine months ended June 30, 2020 and 2019 , respectively.

Transactional and maintenance bookings were 67% and 37% of total bookings for the quarters ended December 31, 2020 and 2019, respectively.

Professional services bookings were 23% and 36% of total bookings for the quarters ended December 31, 2020 and 2019, respectively.

License bookings were 10% and 27% of total bookings for the quarters ended December 31, 2020 and 2019, respectively.

RESULTS OF OPERATIONS

The following tables set forth certain summary information on a segment basis related to our revenues for the quarters and nine-month periods ended June 30, 2020 and 2019 :

Quarter Ended June 30,

Percentage of Revenues

Period-to-Period Change

Period-to-Period

Percentage Change

(In thousands)

Decision Management Software

Nine Months Ended June 30,

Percentage of Revenues

Period-to-Period Change

Period-to-Period

Percentage Change

(In thousands)

Decision Management Software

Quarter Ended June 30, 2020 Compared to Quarter Ended June 30, 2019

Quarter Ended June 30,

Period-to-Period Change

Period-to-Period

Percentage Change

(In thousands)

Transactional and maintenance

Professional services

Applications segment revenues decreased $24.2 million primarily due to a $28.5 million decrease in our fraud solutions and a $1.3 million decrease in our customer communication services, partially offset by a $5.5 million increase in our compliance solutions.

The decrease in fraud solutions was primarily attributable to a decrease in license revenue, driven by a large multi-year license renewal recognized during the quarter ended June 30, 2019.

The decrease in customer communication services was primarily attributable to a decrease in transactional revenue.

The increase in compliance solutions was primarily attributable to an increase in license revenue.

Quarter Ended June 30,

Period-to-Period Change

Period-to-Period

The following tables set forth certain summary information on a segment basis related to our revenues for the quarters ended December 31, 2020 and 2019:

Quarter Ended December 31, Percentage of Revenues Period-to-Period Change Period-to-Period

Percentage Change

(In thousands)

Transactional and maintenance

Professional services

Scores segment revenues increased $16.4 million due to an increase of $9.9 million in our business-to-business scores revenue and $6.5 million in our business-to-consumer services revenue.

The increase in business-to-business scores was primarily attributable to a higher unit price in unsecured originations as well as an increase in mortgage volumes during the quarter ended June 30, 2020.

The increase was partially offset by a decrease in unsecured originations volume.

The increase in business-to-consumer services was primarily attributable to an increase in direct sales generated from the myFICO.com website.

During the quarters ended June 30, 2020 and 2019 , revenues generated from our agreements with Experian accounted for 15% and 13%, respectively, of our total revenues, and revenues generated from our agreements with Equifax and TransUnion together accounted for 19% and 16%, respectively, of our total revenues.

Revenues from these customers included amounts recorded in our other segments.

Segment 2020 2019 2020 2019

(In thousands) (In thousands)

Applications $ 135,361 $ 152,178 43 % 51 % $ (16,817) (11) %

Scores 144,651 115,138 46 % 39 % 29,513 26 %

Decision Management Software 32,402 31,188 11 % 10 % 1,214 4 %

Quarter Ended June 30,

Period-to-Period Change

Period-to-Period

Percentage Change

(In thousands)

Transactional and maintenance

Professional services

Decision Management Software segment revenues increased $7.3 million primarily attributable to an increase in our SaaS subscription revenue classified as transactional and maintenance revenue, and an increase in services and license revenue.

Nine Months Ended June 30, 2020 Compared to Nine Months Ended June 30, 2019

Nine Months Ended June 30,

Period-to-Period Change

Period-to-Period

Total $ 312,414 $ 298,504 100 % 100 % 13,910 5 %

Quarter Ended December 31, Period-to-Period Change Period-to-Period

Percentage Change

(In thousands)

(In thousands) (In thousands)

Transactional and maintenance $ 97,731 $ 98,837 $ (1,106) (1) %

Professional services 30,605 34,023 (3,418) (10) %

Applications segment revenues decreased $21.2 million primarily attributable to a $27.4 million decrease in our fraud solutions, a $6.8 million decrease in our collections and recovery solutions, and a $2.2 million decrease in our customer communications services, partially offset by a $7.9 million increase in our compliance solutions and a $7.7 million increase in our originations solutions.

The decrease in fraud solutions was primarily attributable to a decrease in license revenue, driven by a large multi-year license renewal recognized during the nine months ended June 30, 2019.

The decrease in collections and recovery revenue was primarily attributable to a decrease in services and license revenues.

The decrease in customer communication services was primarily attributable to a decrease in transactional revenue.

The increase in compliance solutions was primarily attributable to an increase in services and license revenues.

The increase in originations solutions was primarily due to an increase in SaaS subscription revenue classified as transactional and maintenance revenue and an increase in license revenue.

Nine Months Ended June 30,

Period-to-Period Change

Period-to-Period

License 7,025 19,318 (12,293) (64) %

Total $ 135,361 $ 152,178 (16,817) (11) %

Applications segment revenues decreased $16.8 million primarily due to a $12.8 million decrease in our fraud solutions, a $2.0 million decrease in our customer management solutions, and a $1.5 million decrease in our originations solutions.

The decrease in fraud solutions was primarily attributable to the shift in the timing of revenue recognition on our term license subscription sales as a result of changing our practice of selling term licenses with separate license and maintenance components to a single software subscription contract with license and maintenance bundled, as well as a decrease in the number and size of term license deals signed or renewed during the quarter ended December 31, 2020.

The decrease in customer management solutions and originations solutions was primarily attributable to a decrease in services revenue.

Quarter Ended December 31, Period-to-Period Change Period-to-Period

Percentage Change

(In thousands)

(In thousands) (In thousands)

Transactional and maintenance $ 138,590 $ 107,446 $ 31,144 29 %

Professional services 117 264 (147) (56) %

License 5,944 7,428 (1,484) (20) %

Total $ 144,651 $ 115,138 29,513 26 %

Scores segment revenues increased $29.5 million due to an increase of $16.8 million in our business-to-business scores revenue and $12.7 million in our business-to-consumer services revenue.

The increase in business-to-business scores was primarily attributable to a higher unit price in auto and unsecured originations, an increase in mortgage volumes, as well as a large annual license deal recognized during the nine months ended June 30, 2020.

The increase was partially offset by a decrease in unsecured originations volume.

The increase in business-to-consumer services was attributable to an increase in both royalties derived from scores sold indirectly to consumers through credit reporting agencies and direct sales generated from the myFICO.com website.

During the nine months ended June 30, 2020 and 2019 , revenues generated from our agreements with Experian accounted for 14% and 13%, respectively, of our total revenues, and revenues generated from our agreements with Equifax and TransUnion together accounted for 18% and 13%, respectively, of our total revenues.

The increase in business-to-business scores revenue was primarily attributable to an increase in mortgage volumes as well as a higher unit price in unsecured originations during the quarter ended December 31, 2020.

The increase was partially offset by a volume decrease in unsecured originations.

The increase in business-to-consumer services revenue was attributable to an increase in both royalties derived from direct sales generated from the myFICO.com website and scores sold indirectly to consumers through credit reporting agencies.

Revenues generated from our agreements with Experian, TransUnion, and Equifax accounted for 14%, 11% and 9%, respectively, of our total revenues for the quarter ended December 31, 2020.

Revenues generated from our agreements with Experian, TransUnion, and Equifax accounted for 11%, 8% and 6%, respectively, of our total revenues for the quarter ended December 31, 2019.

Revenues from these customers included amounts recorded in our other segments.

Decision Management Software

Nine Months Ended June 30,

Period-to-Period Change

Period-to-Period

Quarter Ended December 31, Period-to-Period Change Period-to-Period

Percentage Change

(In thousands)

(In thousands) (In thousands)

Transactional and maintenance $ 15,829 $ 14,091 $ 1,738 12 %

Professional services 10,703 9,738 965 10 %

Decision Management Software segment revenues increased $16.1 million primarily attributable to an increase in our SaaS subscription revenue classified as transactional and maintenance revenue and an increase in license revenue.

License 5,870 7,359 (1,489) (20) %

Total $ 32,402 $ 31,188 1,214 4 %

Decision Management Software segment revenues increased $1.2 million primarily attributable to an increase in our SaaS subscription revenue classified as transactional and maintenance revenue, partially offset by a decrease in license revenue.

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-month periods ended June 30, 2020 and 2019 :

Quarter Ended June 30,

Percentage of Revenues

Period-to-Period Change

The following tables set forth certain summary information related to our condensed consolidated statements of income and comprehensive income for the quarters ended December 31, 2020 and 2019:

Quarter Ended December 31, Percentage of Revenues Period-to-Period Change Period-to-

Percentage Change

2020 2019 2020 2019

(In thousands, except

(In thousands,

employees) (In thousands,

except employees)

Revenues $ 312,414 $ 298,504 100 % 100 % $ 13,910 5 %

Operating expenses:

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Amortization of intangible assets 937 1,796 — % 1 % (859) (48) %

Restructuring and impairment charges — 3,104 — % 1 % (3,104) (100) %

Gain on sale of product line assets (7,334) — (2) % — % (7,334) — %

Total operating expenses 217,693 246,622 70 % 83 % (28,929) (12) %

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Interest expense, net (9,641) (9,768) (3) % (3) % 127 (1) %

Other income, net

Other income (expense), net 2,880 (219) 1 % — % 3,099 (1,415) %

Income before income taxes 87,960 41,895 28 % 14 % 46,065 110 %

Income tax provision

Income tax provision (benefit) 1,468 (13,026) — % (4) % 14,494 (111) %

Net income $ 86,492 $ 54,921 28 % 18 % 31,571 57 %

Number of employees at quarter end 3,890 3,956 (66) (2) %

Nine Months Ended June 30,

Percentage of Revenues

Period-to-Period Change

Percentage Change

(In thousands)

Operating expenses:

Cost of Revenues

Research and development

Selling, general and administrative

Amortization of intangible assets

Restructuring and acquisition-related

Total operating expenses

Operating income

Interest expense, net

Other income, net

Income before income taxes

Income tax provision

Cost of Revenues

Cost of revenues consists primarily of employee salaries and benefits for personnel directly involved in delivering software products, operating SaaS infrastructure, and providing support, implementation and consulting services;

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and outside services.

The quarter-over-prior year quarter increase in cost of revenues of $1.4 million was primarily attributable to an increase in cloud infrastructure costs, driven by increased resource requirements due to expansion in our cloud infrastructure operations, partially offset by a decrease in travel activity due to the COVID-19 outbreak.

Cost of revenues as a percentage of revenues was 29% during the quarter ended June 30, 2020 , materially consistent with that incurred during the quarter ended June 30, 2019 .

The year-to-date period over period increase in cost of revenues of $18.6 million was primarily attributable to a $15.1 million increase in allocated facilities and infrastructure costs and a $5.9 million increase in direct materials cost, partially offset by a $2.8 million decrease in travel costs.

The increase in facilities and infrastructure costs was primarily attributable to increased resource requirements due to expansion in our cloud infrastructure operations.

The increase in direct materials cost was primarily attributable to an increase in telecommunication cost, as well as an increase in license and Scores revenues that incur third-party royalties and data costs.

The decrease in travel costs was primarily attributable to the COVID-19 outbreak.

Cost of revenues as a percentage of revenues was 29% during the nine months ended June 30, 2020, consistent with that incurred during the nine months ended June 30, 2019.

The quarter-over-prior year quarter decrease in cost of revenues of $1.2 million was primarily attributable to a decrease in travel activity due to the COVID-19 outbreak, partially offset by an increase in third-party data costs associated with the increase in our business-to-consumer revenue.

Cost of revenues as a percentage of revenues decreased to 29% during the quarter ended December 31, 2020 from 30% during the quarter ended December 31, 2019.

Research and Development

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The quarter-over-prior year quarter increase in research and development expenses of $1.7 million was primarily attributable to an increase in labor and personnel costs as a result of increased headcount and increased fringe benefit costs related to our supplemental retirement and savings plan.

Research and development expenses as a percentage of revenues increased to 13% during the quarter ended June 30, 2020 from 12% during the quarter ended June 30, 2019 .

The year-to-date period over period increase in research and development expenses of $9.7 million was primarily attributable to an increase in labor and personnel costs and an increase in allocated facilities and infrastructure costs, both driven by increased headcount and our continued investments in new product development.

Research and development expenses as a percentage of revenues was 13% during the nine months ended June 30, 2020, consistent with that incurred during the nine months ended June 30, 2019.

Research and development expenses as a percentage of revenues was 13% during the quarter ended December 31, 2020, consistent with the quarter ended December 31, 2019.

Selling, General and Administrative

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and the cost of operating computer systems.

The quarter-over-prior year quarter decrease in selling, general and administrative expenses of $3.1 million was primarily attributable to a $4.9 million decrease in travel activity due to the COVID-19 outbreak, partially offset by a $2.2 million increase in non-capitalizable commission cost.

Selling, general and administrative expenses as a percentage of revenues decreased to 32% during the quarter ended June 30, 2020 from 33% during the quarter ended June 30, 2019 .

The year-to-date period over period increase in selling, general and administrative expenses of $7.2 million was primarily attributable to a $10.1 million increase in personnel and labor costs and a $2.3 million increase in bad debt expense, partially offset by a $3.2 million decrease in marketing and travel costs and a $2.2 million decrease in allocated facilities costs.

The increase in personnel and labor costs was primarily attributable to an increase in headcount.

The increase in bad debt expense was attributable to estimated losses reserved for customers and industries that are most impacted by COVID-19.

The decrease in marketing and travel costs was primarily attributable to a decrease in travel activity due to COVID-19 as well as our company-wide initiative to control travel spending prior to the COVID-19 outbreak, partially offset by a company-wide marketing event — FICO WORLD 19 — held during the first quarter of our fiscal 2020.

Selling, general and administrative expenses as a percentage of revenues decreased to 34% during the nine months ended June 30, 2020 from 36% during the nine months ended June 30, 2019 primarily due to increased revenues.

The quarter-over-prior year quarter decrease in selling, general and administrative expenses of $18.1 million was primarily attributable to a $4.9 million decrease in travel activity due to the COVID-19 outbreak, a $4.7 million decrease in marketing costs primarily driven by a company-wide marketing event held during the quarter ended December 31, 2019, and a $2.6 million decrease in non-capitalizable commission cost.

The decrease was also attributable to a $1.8 million decrease in labor and personnel costs, as well as a $1.7 million decrease in allocated facilities and infrastructure cost, largely driven by our strategic cost initiative implemented in September 2020, in which we reduced our workforce, consolidated office space and abandoned certain property and equipment.

Selling, general and administrative expenses as a percentage of revenues decreased to 30% during the quarter ended December 31, 2020 from 38% during the quarter ended December 31, 2019.

Amortization of Intangible Assets

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Our finite-lived intangible assets, consisting primarily of completed technology and customer contracts and relationships, are being amortized using the straight-line method over periods ranging from four to fifteen years.

Amortization expense was $1.0 million during the quarter ended June 30, 2020 versus $1.4 million during the quarter ended June 30, 2019.

Amortization expense was $4.0 million during the nine months ended June 30, 2020 versus $4.5 million during the nine months ended June 30, 2020.

Restructuring and Acquisition-Related

There was no restructuring activity during the quarter ended June 30, 2020.

During the nine months ended June 30, 2020, we incurred employee separation costs of $3.1 million due to the elimination of 69 positions throughout the Company.

We expect that cash payment for all the employee separation costs will be paid by the end of our fiscal 2020.

There was no acquisition-related expense during the quarter and nine months ended June 30, 2020.

There were no restructuring or acquisition-related expenses during the quarter and nine months ended June 30, 2019.

The quarter-over-prior year quarter decrease in amortization expense of $0.9 million was primarily attributable to certain assets associated with our Tonbeller acquisition becoming fully amortized in January 2020.

Restructuring and Impairment Charges

There were no restructuring expenses during the quarter ended December 31, 2020.

During the quarter ended December 31, 2019, we incurred employee separation costs of $3.1 million due to the elimination of 69 positions throughout the Company.

Cash payments for all the employee separation costs were paid during fiscal 2020.

Gain on Sale of Product Line Assets

The $7.3 million gain on the sale of product line assets during the quarter ended December 31, 2020 was attributable to the sale of all assets related to our cyber risk score operations in October 2020;

and the sale of certain assets related to our Applications and Decision Management Software operations to an affiliated joint venture in China in December 2020.

Interest Expense, Net

Interest expense includes primarily interest on the senior notes issued in July 2010, May 2018, and December 2019, as well as interest and credit facility fees on the revolving line of credit.

Our consolidated statements of income and comprehensive income include interest expense netted with interest income, which is derived primarily from the investment of funds in excess of our immediate operating requirements.

The quarter-over-prior year quarter increase in interest expense, net of $1.1 million was primarily attributable to a higher average outstanding debt balance during the quarter ended June 30, 2020.

The year-to-date period over period increase in interest expense, net of $2.5 million was primarily attributable to a higher average outstanding debt balance during the nine months ended June 30, 2020.

Other Income, Net

Other income, net consists primarily of realized investment gains/losses, exchange rate gains/losses resulting from remeasurement of foreign-currency-denominated receivable and cash balances into their respective functional currencies at period-end market rates, net of the impact of offsetting foreign currency forward contracts and other non-operating items.

The quarter-over-prior year quarter increase in other income, net of $2.1 million was primarily attributable to an increase in net unrealized gains on our supplemental retirement and savings plan, partially offset by an increase in foreign currency exchange losses.

The year-to-date other income, net was $2.3 million during the nine months ended June 30, 2020 versus $1.7 million during the nine months ended June 30, 2019.

Interest expense includes primarily interest on the senior notes issued in December 2019, May 2018, and July 2010 (which July 2010 senior notes were paid in full at maturity in July 2020), as well as interest and credit facility fees on the revolving line of credit.

Our condensed consolidated statements of income and comprehensive income include interest expense netted with interest income, which is derived primarily from the investment of funds in excess of our immediate operating requirements.

Interest expense, net was $9.6 million during the quarter ended December 31, 2020, consistent with the quarter ended December 31, 2019.

Other Income (Expense), Net

Other income (expense), net consists primarily of realized investment gains/losses, exchange rate gains/losses resulting from remeasurement of foreign-currency-denominated receivable and cash balances into their respective functional currencies at period-end market rates, net of the impact of offsetting foreign currency forward contracts and other non-operating items.

The quarter-over-prior year quarter increase in other income (expense), net of $3.1 million was primarily attributable to a decrease in foreign currency exchange losses, as well as an increase in net unrealized gains on our supplemental retirement and savings plan.

Income Tax Provision

The effective income tax rate was 15.9% and 17.8% during the quarters ended June 30, 2020 and 2019 , respectively, and 1.8% and 11.4% during the nine months ended June 30, 2020 and 2019, respectively.

The effective income tax rate was 1.7% and (31.1)% during the quarters ended December 31, 2020 and 2019, respectively.

The provision for income taxes during interim quarterly reporting periods is based on our estimates of the effective tax rates for the full fiscal year.

The effective tax rate in any quarter can also be affected positively or negatively by adjustments that are required to be reported in the specific quarter of resolution.

The effective tax rates for the nine months ended June 30, 2020 and 2019 were both impacted by the recording of excess tax benefits relating to stock awards.

Stock exercises during the nine months ended June 30, 2020 resulted in an additional increase in excess tax benefits.

Operating Income

The following tables set forth certain summary information on a segment basis related to our operating income (loss) for the quarters and nine-month periods ended June 30, 2020 and 2019 :

Quarter Ended June 30,

Period-to-Period Change

Period-to-Period

Percentage Change

(In thousands)

Decision Management Software

Corporate expenses

Total segment operating income

Unallocated share-based compensation

Unallocated amortization expense

The effective tax rates for the quarters ended December 31, 2020 and 2019 were both impacted by the recording of excess tax benefits relating to stock awards.

The impact is dependent upon grants of stock-based compensation and the future stock price in relation to the fair value of awards on the grant date.

The increase in stock price for awards that vested in December 2019 was significantly larger than the increase in stock price for the awards that vested in December 2020.

Operating Income

Nine Months Ended June 30,

Period-to-Period Change

Period-to-Period

The following tables set forth certain summary information on a segment basis related to our operating income (loss) for the quarters ended December 31, 2020 and 2019:

Quarter Ended December 31, Period-to-Period Change Period-to-Period

Percentage Change

(In thousands)

Segment 2020 2019

(In thousands) (In thousands)

Applications $ 35,502 $ 36,168 $ (666) (2) %

Scores 123,025 97,426 25,599 26 %

Decision Management Software (14,818) (19,457) 4,639 (24) %

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Unallocated amortization expense (937) (1,796) 859 (48) %

Unallocated restructuring and acquisition-related

Unallocated restructuring and impairment charges — (3,104) 3,104 (100) %

Unallocated gain on sale of product line assets 7,334 — 7,334 — %

Operating income $ 94,721 $ 51,882 42,839 83 %

Quarter Ended

Percentage of

Nine Months Ended

Percentage of

(In thousands)

December 31, Percentage of

2020 2019 2020 2019

(In thousands)

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Quarter Ended

Percentage of

Nine Months Ended

Percentage of

(In thousands)

December 31, Percentage of

2020 2019 2020 2019

(In thousands)

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Quarter Ended

Percentage of

Nine Months Ended

Percentage of

(In thousands)

December 31, Percentage of

2020 2019 2020 2019

(In thousands)

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Segment operating loss $ (14,818) $ (19,457) (46) % (62) %

The quarter-over-prior year quarter $2.8 million decrease in operating income was primarily attributable to a $4.8 million increase in segment operating expenses, a $2.7 million increase in share-based compensation cost and a $0.5 million decrease in segment revenues, partially offset by a $4.7 million decrease in corporate expenses.

At the segment level, the quarter-over-prior year quarter $0.6 million decrease in segment operating income was the result of a $21.8 million decrease in our Applications segment operating income, partially offset by a $10.9 million increase in our Scores segment operating income, a $5.6 million decrease in our Decision Management Software segment operating loss, and a $4.7 million decrease in corporate expenses.

The quarter-over-prior year quarter $21.8 million decrease in Applications segment operating income was due to a $24.1 million decrease in segment revenue, driven primarily by a large multi-year license renewal recognized during the quarter ended June 30, 2019, partially offset by a $2.3 million decrease in segment operating expenses.

Segment operating margin for Applications decreased to 21% from 32%, mainly due to a decrease in sales of our higher-margin software products.

The quarter-over-prior year quarter $10.9 million increase in Scores segment operating income was due to a $16.4 million increase in segment revenue, partially offset by a $5.5 million increase in segment operating expenses, primarily attributable to an increase in fringe benefit costs related to our supplemental retirement and savings plan.

Segment operating margin for Scores during the quarter ended June 30, 2020 was 84%, materially consistent with the quarter ended June 30, 2019.

The quarter-over-prior year quarter $5.6 million decrease in Decision Management Software segment operating loss was due to a $7.2 million increase in segment revenue, partially offset by a $1.6 million increase in segment operating expenses.

Segment operating margin for Decision Management Software improved to negative 8% from negative 26%, primarily due to an increase in sales of our higher-margin products.

The year-to-date period over period increase of $27.2 million in operating income was primarily attributable to a $65.5 million increase in segment revenues and a $5.5 million decrease in corporate expenses, partially offset by a $34.8 million increase in segment operating expenses, a $6.3 million increase in share-based compensation cost, and a $3.1 million increase in restructuring and acquisition-related cost.

At the segment level, the year-to-date period over period increase of $36.2 million in segment operating income was the result of a $61.4 million increase in our Scores segment operating income and a $5.5 million decrease in corporate expenses, partially offset by a $27.1 million decrease in our Applications segment operating income and a $3.6 million increase in our Decision Management Software segment operating loss.

The year-to-date period over period $27.1 million decrease in Applications segment operating income was due to a $21.2 million decrease in segment revenue and a $5.9 million increase in segment operating expenses.

Segment operating margin for Applications decreased to 22% from 27%, mainly due to a decrease in sales of our higher-margin software products.

The year-to-date period over period $61.4 million increase in Scores segment operating income was attributable to a $70.6 million increase in segment revenue, partially offset by a $9.2 million increase in segment operating expenses.

Segment operating margin for Scores during the nine months ended June 30, 2020 was 85%, consistent with the nine months ended June 30, 2019.

The year-to-date period over period $3.6 million increase in Decision Management Software segment operating loss was attributable to a $19.7 million increase in segment operating expenses, partially offset by a $16.1 million increase in segment revenue.

Segment operating margin for Decision Management Software was negative 28%, materially consistent with the nine months ended June 30, 2019.

The quarter-over-prior year quarter $42.8 million increase in operating income was primarily attributable to a $15.6 million decrease in segment operating expenses, a $13.9 million increase in segment revenues, a $7.3 million increase in gain on the sale of product line assets, and a $4.0 million decrease in corporate expenses.

At the segment level, the quarter-over-prior year quarter $33.5 million increase in segment operating income was the result of a $25.6 million increase in our Scores segment operating income, a $4.6 million decrease in our Decision Management Software segment operating loss, and a $4.0 million decrease in corporate expenses, partially offset by a $0.7 million decrease in our Applications segment operating income.

The quarter-over-prior year quarter $0.7 million decrease in Applications segment operating income was due to a $16.8 million decrease in segment revenue, partially offset by a $16.1 million decrease in segment operating expenses.

Segment operating margin for Applications increased to 26% from 24%, primarily attributable to a decrease in travel activity due to COVID-19, as well as our strategic cost initiative implemented in September 2020 in which we reduced our workforce, consolidated office space and abandoned certain property and equipment.

The quarter-over-prior year quarter $25.6 million increase in Scores segment operating income was due to a $29.5 million increase in segment revenue, partially offset by a $3.9 million increase in segment operating expenses.

Segment operating margin for Scores during the quarter ended December 31, 2020 was 85%, consistent with the quarter ended December 31, 2019.

The quarter-over-prior year quarter $4.6 million decrease in Decision Management Software segment operating loss was due to a $3.4 million decrease in segment operating expenses and a $1.2 million increase in segment revenue.

Segment operating margin for Decision Management Software improved to negative 46% from negative 62%, primarily attributable to a decrease in travel activity due to COVID-19, as well as our strategic cost initiative implemented in September 2020, in which we reduced our workforce, consolidated office space and abandoned certain property and equipment.

CAPITAL RESOURCES AND LIQUIDITY

As of June 30, 2020 , we had $125.7 million in cash and cash equivalents, which included $100.3 million held off-shore by our foreign subsidiaries.

Subsequently, we utilized our revolving line of credit to repay $85.0 million in principal due in July 2020 on our senior notes issued in July 2010.

As of December 31, 2020, we had $144.7 million in cash and cash equivalents, which included $97.7 million held by our foreign subsidiaries.

Our cash position could be affected by various risks and uncertainties, including, but not limited to, the effects of the COVID-19 pandemic and other risks detailed in Part II, Item 1A titled “Risk Factors” of this Quarterly Report on Form 10-Q.

However, based on our current business plan and revenue prospects, we believe our cash and cash equivalents balances, as well as available borrowings from our $400 million revolving line of credit and anticipated cash flows from operating activities, will be sufficient to fund our working and other capital requirements.

Under our current financing arrangements, we have no other significant debt obligations maturing over the next twelve months.

Under our current financing arrangements, we have no significant debt obligations maturing over the next twelve months.

Our undistributed earnings outside the U.S.

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Summary of Cash Flows

Nine Months Ended June 30,

Period-to-Period Change

Quarter Ended December 31, Period-to-Period Change

(In thousands)

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Our primary method for funding operations and growth has been through cash flows generated from operating activities.

Net cash provided by operating activities increased to $228.7 million during the nine months ended June 30, 2020 from $164.9 million during the nine months ended June 30, 2019 .

The $63.8 million increase was attributable to a $39.7 million increase in net income, a $20.3 million increase in non-cash items, including a $15.0 million increase in operating lease costs and a $6.3 million increase in share-based compensation expense, and a $3.8 million increase that resulted from timing of receipts and payments in our ordinary course of business.

Net cash provided by operating activities increased to $77.9 million during the quarter ended December 31, 2020 from $60.4 million during the quarter ended December 31, 2019.

The $17.5 million increase was attributable to a $31.6 million increase in net income, partially offset by a $7.2 million decrease that resulted from timing of receipts and payments in our ordinary course of business and a $6.8 million decrease in non-cash items, including a $7.3 million gain on the sale of product line assets.

Cash Flows from Investing Activities

Net cash used in investing activities increased to $23.3 million for the nine months ended June 30, 2020 from $20.8 million for the nine months ended June 30, 2019 .

The $2.5 million increase was primarily attributable to a $2.9 million increase in purchases of property and equipment.

Net cash provided by investing activities was $3.9 million for the quarter ended December 31, 2020 as compared to net cash used of $9.0 million for the quarter ended December 31, 2019.

The $12.9 million change was primarily attributable to $8.3 million in cash proceeds from the sale of product line assets and a $3.5 million decrease in purchases of property and equipment.

Cash Flows from Financing Activities

Net cash used in financing activities increased to $183.5 million for the nine months ended June 30, 2020 from $156.1 million for the nine months ended June 30, 2019 .

The $27.4 million increase was primarily attributable to a $300.0 million increase in payments, net of proceeds, on our revolving line of credit, a $48.9 million increase in taxes paid related to net share settlement of equity awards, a $31.1 million increase in repurchases of common stock, and a $6.8 million increase in debt issuance cost, partially offset by a $350.0 million increase in proceeds from issuance of senior notes and a $10.2 million increase in proceeds from issuance of treasury stock under employee stock plans.

Net cash used in financing activities increased to $99.8 million for the quarter ended December 31, 2020 from $48.2 million for the quarter ended December 31, 2019.

The $51.6 million increase was primarily attributable to a $350.0 million decrease in proceeds from issuance of senior notes, partially offset by a $286.0 million decrease in payments, net of proceeds, on our revolving line of credit and a $10.0 million decrease in repurchases of common stock.

Repurchases of Common Stock

In July 2020, our Board of Directors approved a stock repurchase program following the completion of our previous program.

This program was open-ended and authorized repurchases of shares of our common stock up to an aggregate cost of $250.0 million in the open market or in negotiated transactions.

Pursuant to the July 2019 program, we repurchased 157,477 shares of our common stock at a total repurchase price of $54.0 million and 615,456 shares of our common stock at a total repurchase price of $210.0 million during the quarter and nine months ended June 30, 2020 , respectively.

In July 2020, our Board of Directors approved a new stock repurchase program following the completion of the July 2019 program.

The new program is open-ended and authorizes repurchases of shares of our common stock up to an aggregate cost of $250.0 million in the open market or in negotiated transactions.

This program is open-ended and authorizes repurchases of shares of our common stock up to an aggregate cost of $250.0 million in the open market or in negotiated transactions.

Pursuant to the July 2020 program, during the quarter ended December 31, 2020, we repurchased approximately 101,000 shares of our common stock at a total repurchase price of $50.0 million.

Revolving Line of Credit

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maintaining a maximum consolidated leverage ratio of 3.25 on an average trailing four-quarter basis, subject to a step up to 3.75 following certain permitted acquisitions;

and a minimum fixed charge ratio of 2.5 through the maturity of our 2010 Senior Notes in July 2020, upon which maintaining a minimum interest coverage ratio of 3.00.

and a minimum interest coverage ratio of 3.00.

The credit agreement also contains other covenants typical of unsecured facilities.

As of June 30, 2020 , we had $103.0 million in borrowings outstanding at a weighted average interest rate of 1.313% and were in compliance with all financial covenants under this credit facility, and do not believe we are at material risk of not meeting these covenants due to COVID-19.

On July 14, 2010, we issued $245 million of senior notes in a private placement to a group of institutional investors (the “2010 Senior Notes”).

The 2010 Senior Notes were issued in four series with maturities ranging from 6 to 10 years.

The outstanding 2010 Senior Notes’ weighted average interest rate is 5.6% and the weighted average maturity is 10.0 years .

The 2010 Senior Notes required interest payments semi-annually and contained certain restrictive covenants, including the maintenance of a maximum consolidated net debt to consolidated EBITDA ratio of 3.00 and a minimum fixed charge coverage ratio of 2.50.

In July 2020, we repaid the final principal amount of the 2010 Senior Notes at maturity.

As of December 31, 2020, we had $131.0 million in borrowings outstanding at a weighted-average interest rate of 1.284% and we were in compliance with all financial covenants under this credit facility, and do not believe we are at material risk of not meeting these covenants due to COVID-19.

On May 8, 2018, we issued $400 million of senior notes in a private offering to qualified institutional investors (the “2018 Senior Notes”).

The 2018 Senior Notes require interest payments semi-annually at a rate of 5.25% per annum and will mature on May 15, 2026.

On December 6, 2019, we issued $350 million of senior notes in a private offering to qualified institutional investors (the “2019 Senior Notes,” and along with the 2010 Senior Notes and 2018 Senior Notes, the “Senior Notes”).

On December 6, 2019, we issued $350 million of senior notes in a private offering to qualified institutional investors (the “2019 Senior Notes,” and with the 2018 Senior Notes, the “Senior Notes”).

The 2019 Senior Notes require interest payments semi-annually at a rate of 4.00% per annum and will mature on June 15, 2028.

The purchase agreements for the 2010 Senior Notes, as well as the indenture for the 2018 Senior Notes and the 2019 Senior Notes, contain certain covenants typical of unsecured obligations.

As of June 30, 2020 , the carrying value of the Senior Notes was $824.0 million and we were in compliance with all financial covenants under these obligations, and do not believe we are at material risk of not meeting these covenants due to COVID-19.

The indentures for the Senior Notes contain certain covenants typical of unsecured obligations.

As of December 31, 2020, the carrying value of the Senior Notes was $750.0 million and we were in compliance with all financial covenants under these obligations, and do not believe we are at material risk of not meeting these covenants due to COVID-19.

Off-Balance Sheet Arrangements

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For contracts with customers that contain various combinations of products and services, we evaluate whether the products or services are distinct—distinct products or services will be accounted for as separate performance obligations, while non-distinct products or services are combined with others to form a single performance obligation.

For contracts with multiple performance obligations, the transaction price is allocated to each performance obligation on a relative standalone selling price basis.

For contracts with multiple performance obligations, the transaction price is allocated to each performance obligation on a relative standalone selling price (“SSP”) basis.

Revenue is recognized when control of the promised goods or services is transferred to our customers.

License revenue is derived from contracts in which we grant our direct customers or distributors the right to deploy or resell our software and scoring products and solutions on-premises.

Our software offerings often include a perpetual or term-based license and post-contract support or maintenance, both of which generally represent distinct performance obligations and are accounted for separately.

The transaction price is either in the form of a fixed consideration with separate stated prices for license and maintenance, or a usage-based royalty—sometimes subject to a guaranteed minimum—for the license and maintenance bundle.

When the amount is in the form of a fixed consideration, including the guaranteed minimum in usage-based royalty, license revenue from distinct on-premises license is recognized at the point in time when the software or scoring solution is made available to the customer or distributor.

Our software offerings often include a term-based or perpetual license and post-contract support or maintenance, both of which generally represent distinct performance obligations and are accounted for separately.

For term-based licenses, the transaction price is either in the form of a fixed consideration—a single subscription with license and maintenance bundled, or a usage-based royalty—sometimes subject to a guaranteed minimum—for the license and maintenance bundle.

For perpetual licenses, the transaction price is generally a fixed consideration with separately stated prices for license and maintenance.

When the amount is in the form of a fixed consideration, including the guaranteed minimum in usage-based royalty, license revenue from distinct on-premises licenses is recognized at the point in time when the software or scoring solution is made available to the customer or distributor.

Any royalties not subject to the guaranteed minimum or earned in excess of the minimum amount are recognized as transactional revenue when the subsequent sales or usage occurs.

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We determined the nature of our SaaS arrangements is to provide continuous access to our hosted application in the cloud, i.e., a stand-ready obligation that comprises a series of distinct service periods (e.g., a series of distinct daily, monthly or annual periods of service).

We estimate the total variable consideration at contract inception—subject to any constraints that may apply—and update the estimates as new information becomes available and recognize the amount ratably over the SaaS service period, unless we determine it is appropriate to allocate the variable amount to each distinct service period and recognize revenue in the period during which it is earned.

We also derive transactional revenue from credit scoring and monitoring services that provide consumers access to their credit reports and enable them to monitor their credit.

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In addition, we sell premium cloud support on a subscription basis for a fixed amount, and revenue is recognized ratably over the contract term.

Significant Judgments

Our contracts with customers often include promises to transfer multiple products and services to a customer.

Determining whether products and services are considered distinct and should be accounted for separately may require significant judgment.

Specifically, when implementation service is included in the original software or SaaS offerings, judgment is required to determine if the implementation service significantly modifies or customizes the software or SaaS service in such a way that the risks of providing it and the customization service are inseparable.

In rare instances, contracts may include significant modification or customization of the software of SaaS service and will result in the combination of software or SaaS service and implementation service as one performance obligation.

We determine the SSPs using data from our historical standalone sales, or, in instances where such information is not available (such as when we do not sell the product or service separately), we consider factors such as the stated contract prices, our overall pricing practices and objectives, go-to-market strategy, size and type of the transactions, and effects of the geographic area on pricing, among others.

When the selling price of a product or service is highly variable, we may use the residual approach to determine the SSP of that product or service.

Significant judgment may be required to determine the SSP for each distinct performance obligation when it involves the consideration of many market conditions and entity-specific factors discussed above.

Significant judgment may be required to determine the timing of satisfaction of a performance obligation in certain professional services contracts with a fixed consideration, in which we measure progress using an input method based on labor hours expended.

In order to estimate the total hours of the project, we make assumptions about labor utilization, efficiency of processes, the customer’s specification and IT environment, among others.

For certain complex projects, due to the risks and uncertainties inherent with the estimation process and factors relating to the assumptions, actual progress may differ due to the change in estimated total hours.

Adjustments to estimates are made in the period in which the facts requiring such revisions become known and, accordingly, recognized revenues are subject to revisions as the contract progresses to completion.

Capitalized Commission Costs

We capitalize incremental commission fees paid as a result of obtaining customer contracts.

Capitalized commission costs are amortized on a straight-line basis over ten years — determined using a portfolio approach — based on the transfer of goods or services to which the assets relate, taking into consideration both the initial and future contracts as we do not typically pay a commission on a contract renewal.

The amortization costs are included in selling, general, and administrative expenses of our condensed consolidated statements of income and comprehensive income.

We apply a practical expedient to recognize the incremental costs of obtaining contracts as an expense when incurred if the amortization period of the assets that we otherwise would have recognized is one year or less.

These costs are recorded within selling, general, and administrative expenses.

Business Combinations

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Goodwill represents the excess of cost over the fair value of identifiable assets acquired and liabilities assumed in business combinations.

We assess goodwill for impairment for each of our reporting units on an annual basis during the fourth quarter using a July 1 measurement date unless circumstances require a more frequent measurement.

We assess goodwill for impairment for each of our reporting units on an annual basis during our fourth fiscal quarter using a July 1 measurement date unless circumstances require a more frequent measurement.

We have determined that our reporting units are the same as our reportable segments.

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For example, if the economic environment impacts our forecasts beyond what we have anticipated, it could cause the fair value of a reporting unit to fall below its respective carrying value.

For fiscal 2017, we elected to proceed directly to the step one quantitative analysis for all of our reporting units, as three years had elapsed since the date of our previous quantitative valuation.

For fiscal 2017, we elected to proceed directly to the step one quantitative analysis for all of our reporting units.

There was a substantial excess of fair value over carrying value for each of our reporting units and we determined goodwill was not impaired for any of our reporting units for fiscal 2017.

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We estimate our current tax liability using currently enacted tax rates and laws and assess temporary differences that result from differing treatments of certain items for tax and accounting purposes.

These differences result in deferred tax assets and liabilities recorded on our balance sheet using the currently enacted tax rates and laws that will apply to taxable income for the years in which those tax assets are expected to be realized or settled.

These differences result in deferred tax assets and liabilities recorded on our condensed consolidated balance sheets using the currently enacted tax rates and laws that will apply to taxable income for the years in which those tax assets are expected to be realized or settled.

We then assess the likelihood our deferred tax assets will be realized and to the extent we believe realization is not more likely than not, we establish a valuation allowance.

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Recently Adopted Accounting Pronouncements

In February 2016, the FASB issued Topic 842, which requires the recognition of operating lease assets and lease liabilities on the balance sheet.

Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement.

Under the new standard, disclosures are required to enable users of financial statements to assess the amount, timing and uncertainty of cash flows arising from leases.

In the first quarter of fiscal 2020, we adopted Topic 842 using the “Comparatives Under 840 Option” approach to transition.

In accordance with the standard, the comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods.

Topic 842 provides a package of practical expedients that allow us to not reassess (1) whether any expired or existing contracts contain a lease, (2) the lease classification of any expired or existing lease, and (3) initial direct costs for any existing leases.

We elected to apply the package of practical expedients, and did not elect the hindsight practical expedient in determining the lease term for existing leases as of October 1, 2019.

Adoption of Topic 842 did not result in the recognition of a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption.

The most significant impact of adoption was the recognition of operating lease assets and operating lease liabilities of $89.8 million and $98.9 million, respectively, while our accounting for existing capital leases (now referred to as finance leases) remained substantially unchanged.

We expect the impact of adoption to be immaterial to our consolidated statements of income and comprehensive income and consolidated statements of cash flows on an ongoing basis.

As part of our adoption, we also modified our control procedures and processes, none of which materially affected our internal control over financial reporting.

See Note 13 to the accompanying condensed consolidated financial statements for additional information regarding our accounting policy for leases and additional disclosures.

Recent Accounting Pronouncements Not Yet Adopted

In August 2018, the FASB issued ASU No.

In August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No.

2018-15, Intangibles—Goodwill and Other (Topic 350):

1 unchanged sentence

ASU 2018-15 aligns the requirements for capitalizing implementation costs incurred in a cloud computing arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software.

The standard is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2019, which means that it will be effective for our fiscal year beginning October 1, 2020.

Early adoption is permitted.

We do not believe that adoption of ASU 2018-15 will have a significant impact on our consolidated financial statements.

We adopted ASU 2018-15 in the first quarter of our fiscal 2021 and the adoption did not have a significant impact on our condensed consolidated financial statements.

In June 2016, the FASB issued ASU No.

3 unchanged sentences

Topic 326 requires measurement and recognition of expected credit losses for financial assets held.

Topic 326 is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2019, which means it will be effective for our fiscal year beginning October 1, 2020.

Early adoption is permitted.

We do not believe that adoption of Topic 326 will have a significant impact on our consolidated financial statements.

We do not expect that any other recently issued accounting pronouncements will have a significant effect on our financial statements.

We adopted Topic 326 in the first quarter of our fiscal 2021 and the adoption did not have a significant impact on our condensed consolidated financial statements.

Recent Accounting Pronouncements Not Yet Adopted

We do not expect that any recently issued accounting pronouncements will have a significant effect on our financial statements.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis