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Item 2. Management’s Discussion and Analysis

2021-05-05 compared with 2021-01-28 · 200 added, 90 removed, 385 unchanged (43% of the section changed)

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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 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.

Our predictive analytics, which includes the industry-standard FICO ® Score, and our decision management systems leverage the use of big data and mathematical algorithms to predict, categorize, and describe consumer behavior in order to power hundreds of billions of customer decisions each year.

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.

Our predictive analytics, which includes the industry-standard FICO ® Score, and our decision management technologies leverage the use of data and mathematical algorithms to predict, categorize, and describe consumer behavior in order to power hundreds of billions of customer decisions each year.

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, measure and manage credit risk, maintain regulatory compliance, 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, automotive companies, pharmaceutical companies, healthcare organizations, public agencies and organizations in other industries.

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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.

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 81% and 74% of our revenues during the quarters ended December 31, 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 90% and 86% of our revenues were derived from within this industry during the quarters ended March 31, 2021 and 2020, respectively, and 87% and 85% of our revenues were derived from within this industry during the six months ended March 31, 2021 and 2020, respectively.

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

Arrangements with transactional or unit-based pricing accounted for 85% and 78% of our revenues during the quarters ended March 31, 2021 and 2020, respectively.

Arrangements with transactional or unit-based pricing accounted for 83% and 76% of our revenues during the six months ended March 31, 2021 and 2020, 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.

International revenues accounted for 29% and 32% of total consolidated revenues for the quarters ended March 31, 2021 and 2020, respectively, and 29% and 32% of total consolidated revenues for the six months ended March 31, 2021 and 2020, respectively.

Revenue increased 8% to $331.4 million during the quarter ended March 31, 2021 from $308.0 million for the quarter ended March 31, 2020, and 6% to $643.8 million during the six months ended March 31, 2021 from $606.5 million during the six months ended March 31, 2020.

We continue to drive growth in our Scores segment.

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.

Scores revenue increased 31% to $168.7 million during the quarter ended March 31, 2021 from $129.1 million during the quarter ended March 31, 2020, and 28% to $313.4 million during the six months ended March 31, 2021 from $244.3 million during the six months ended March 31, 2020.

Scores operating income increased 29% to $146.5 million during the quarter ended March 31, 2021 from $113.5 million during the quarter ended March 31, 2020, and 28% to $269.6 million during the six months ended March 31, 2021 from $210.9 million during the six months ended March 31, 2020.

For our Applications and Decision Management Software segments, revenue decreased 9% to $162.6 million during the quarter ended March 31, 2021 from $178.8 million during the quarter ended March 31, 2020, and 9% to $330.4 million during the six months ended March 31, 2021 from $362.2 million during the six months ended March 31, 2020.

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.

as well as our recent strategic shift to emphasize software over services.

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.

This transition has shifted 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.

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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.

Operating income increased 34% to $101.2 million during the quarter ended March 31, 2021 from $75.7 million during the quarter ended March 31, 2020, and net income increased 18% to $68.7 million during the quarter ended March 31, 2021 from $58.3 million during the quarter ended March 31, 2020.

Operating income increased 54% to $195.9 million during the six months ended March 31, 2021 from $127.6 million during the six months ended March 31, 2020, and net income increased 37% to $155.2 million from $113.2 million, primarily driven by higher operating income during the six months ended March 31, 2021, partially offset by lower excess tax benefits related to stock-based compensation.

We continued to advance our cloud-enabled, platform-based software strategy by exiting less strategic areas of our business in order to increase our focus on the FICO Decision Management Platform.

In May 2021, we signed a definitive agreement to sell our Collections and Recovery (“C&R”) business.

The transaction is expected to close in our current fiscal year, subject to customary closing conditions.

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

During the quarter and six months ended March 31, 2021, we repurchased approximately 440,588 shares at a total repurchase price of $205.2 million and 541,738 shares at a total repurchase price of $255.2 million, respectively.

As of March 31, 2021, we had $471.3 million remaining under our current stock repurchase program.

We intend to include the C&R sale proceeds in a $200 million Accelerated Share Repurchase program following the close of the transaction.

COVID-19 Update

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.

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 Part II, Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended September 30, 2020;

certain risk factors included in Part II, Item 1A “Risk Factors” of this Quarterly Report;

and the information presented below under “Results of Operations” in 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.

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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

Quarter Ended March 31, 2021 $ 84.0 10 % 13 34

Quarter Ended March 31, 2020 $ 84.1 14 % 15 35

Six Months Ended March 31, 2021 $ 152.1 17 % 24 NM (a)

Six Months Ended March 31, 2020 $ 196.2 23 % 40 NM (a)

(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.

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.

(a) 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 58% and 44% of total bookings for the quarters ended March 31, 2021 and 2020, respectively.

Professional services bookings were 26% and 40% of total bookings for the quarters ended March 31, 2021 and 2020, respectively.

License bookings were 16% of total bookings for each of the quarters ended March 31, 2021 and 2020.

Transactional and maintenance bookings were 62% and 40% of total bookings for the six months ended March 31, 2021 and 2020, respectively.

Professional services bookings were 25% and 38% of total bookings for the six months ended March 31, 2021 and 2020, respectively.

License bookings were 13% and 22% of total bookings for the six months ended March 31, 2021 and 2020, respectively.

RESULTS OF OPERATIONS

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

The following tables set forth certain summary information on a segment basis related to our revenues for the quarters and six-month periods ended March 31, 2021 and 2020:

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

Percentage Change

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Total $ 331,361 $ 307,971 100 % 100 % 23,390 8 %

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

Six Months Ended March 31, Percentage of Revenues Period-to-Period Change Period-to-Period

Percentage Change

Segment 2021 2020 2021 2020

(In thousands) (In thousands)

Applications $ 264,875 $ 292,457 41 % 48 % $ (27,582) (9) %

Scores 313,370 244,286 49 % 40 % 69,084 28 %

Decision Management Software 65,530 69,732 10 % 12 % (4,202) (6) %

Total $ 643,775 $ 606,475 100 % 100 % 37,300 6 %

Quarter Ended March 31, 2021 Compared to Quarter Ended March 31, 2020

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

Percentage Change

(In thousands) (In thousands)

Transactional and maintenance $ 96,687 $ 97,789 $ (1,102) (1) %

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Total $ 129,514 $ 140,279 (10,765) (8) %

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

Applications segment revenues decreased $10.8 million primarily due to a $7.5 million decrease in services revenue, a $2.2 million decrease in license revenue and a $1.1 million decrease in transactional and maintenance revenue.

The decrease in services revenue was primarily due to our recent strategic shift to emphasize software over services.

The decrease in transactional and maintenance revenue was primarily attributable to a decrease in our fraud solutions revenue, partially offset by an increase in our marketing and compliance solutions revenue.

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

Percentage Change

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Scores segment revenues increased $39.6 million due to an increase of $23.8 million in our business-to-business scores revenue and $15.8 million in our business-to-consumer services revenue.

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-business scores revenue was primarily attributable to a higher unit price in insurance and auto resellers, as well as an increase in auto and mortgage volumes during the quarter ended March 31, 2021.

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 generated from our agreements with Experian, TransUnion, and Equifax accounted for 16%, 13% and 10%, respectively, of our total revenues for the quarter ended March 31, 2021.

Revenues generated from our agreements with Experian, TransUnion, and Equifax accounted for 16%, 10% and 8%, respectively, of our total revenues for the quarter ended March 31, 2020.

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

Decision Management Software

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

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

Percentage Change

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Total $ 33,128 $ 38,544 (5,416) (14) %

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.

Decision Management Software segment revenues decreased $5.4 million primarily due to a $4.6 million decrease in license revenue and a $2.5 million decrease in services revenue, partially offset by a $1.7 million increase in transactional and maintenance revenue.

The decrease in services revenue was primarily due to our recent strategic shift to emphasize software over services.

The increase in transactional and maintenance revenue was primarily attributable to an increase in SaaS subscription revenue.

Six Months Ended March 31, 2021 Compared to Six Months Ended March 31, 2020

Six Months Ended March 31, Period-to-Period Change Period-to-Period

Percentage Change

(In thousands) (In thousands)

Transactional and maintenance $ 194,418 $ 196,626 $ (2,208) (1) %

Professional services 58,232 69,157 (10,925) (16) %

License 12,225 26,674 (14,449) (54) %

Total $ 264,875 $ 292,457 (27,582) (9) %

Applications segment revenues decreased $27.6 million primarily due to a $14.4 million decrease in license revenue, a $10.9 million decrease in services revenue, and a $2.2 million decrease in transactional and maintenance revenue.

The decrease in license revenue 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 six months ended March 31, 2021, mainly in our fraud solutions.

The decrease in services revenue was primarily due to our recent strategic shift to emphasize software over services.

The decrease in transactional and maintenance revenue was primarily attributable to a decrease in our fraud solutions, partially offset by an increase in our compliance and marketing solutions.

Six Months Ended March 31, Period-to-Period Change Period-to-Period

Percentage Change

(In thousands) (In thousands)

Transactional and maintenance $ 305,802 $ 235,056 $ 70,746 30 %

Professional services 820 1,083 (263) (24) %

License 6,748 8,147 (1,399) (17) %

Total $ 313,370 $ 244,286 69,084 28 %

Scores segment revenues increased $69.1 million due to an increase of $40.6 million in our business-to-business scores revenue and $28.5 million in our business-to-consumer services revenue.

The increase in business-to-business scores revenue was primarily attributable to a higher unit price in auto, unsecured originations and insurance, and an increase in mortgage and auto volumes, partially offset by a decrease in unsecured originations volume.

The increase in business-to-consumer services revenue 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.

Revenues generated from our agreements with Experian, TransUnion, and Equifax accounted for 15%, 12% and 10%, respectively, of our total revenues for the six months ended March 31, 2021.

Revenues generated from our agreements with Experian, TransUnion, and Equifax accounted for 14%, 10% and 7%, respectively, of our total revenues for the six months ended March 31, 2020.

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

Decision Management Software

Six Months Ended March 31, Period-to-Period Change Period-to-Period

Percentage Change

(In thousands) (In thousands)

Transactional and maintenance $ 32,849 $ 29,394 $ 3,455 12 %

Professional services 20,167 21,690 (1,523) (7) %

License 12,514 18,648 (6,134) (33) %

Total $ 65,530 $ 69,732 (4,202) (6) %

Decision Management Software segment revenues decreased $4.2 million primarily due to a $6.1 million decrease in license revenue, and a $1.5 million decrease in services revenue, partially offset by a $3.5 million increase in transactional and maintenance revenue.

The decrease in services revenue was primarily due to our recent strategic shift to emphasize software over services.

The increase in transactional and maintenance revenue was primarily attributable to an increase in SaaS subscription 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 ended December 31, 2020 and 2019:

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

The following tables set forth certain summary information related to our condensed consolidated statements of income and comprehensive income for the quarters and six-month periods ended March 31, 2021 and 2020:

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

Percentage Change

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Amortization of intangible assets 945 1,202 — % — % (257) (21) %

Total operating expenses 230,162 232,245 69 % 75 % (2,083) (1) %

Operating income 101,199 75,726 31 % 25 % 25,473 34 %

Interest expense, net (9,943) (11,254) (3) % (4) % 1,311 (12) %

Other income (expense), net 568 (2,008) — % (1) % 2,576 (128) %

Income before income taxes 91,824 62,464 28 % 20 % 29,360 47 %

Income tax provision 23,150 4,176 7 % 1 % 18,974 454 %

Net income $ 68,674 $ 58,288 21 % 19 % 10,386 18 %

Number of employees at quarter end 3,953 4,029 (76) (2) %

Six Months Ended March 31, Percentage of Revenues Period-to-Period Change Period-to-

Percentage Change

2021 2020 2021 2020

(In thousands) (In thousands)

Revenues $ 643,775 $ 606,475 100 % 100 % $ 37,300 6 %

Operating expenses:

Cost of revenues 177,861 178,897 28 % 29 % (1,036) (1) %

Research and development 84,263 78,382 13 % 13 % 5,881 8 %

Selling, general and administrative 191,183 215,486 30 % 36 % (24,303) (11) %

Amortization of intangible assets 1,882 2,998 — % — % (1,116) (37) %

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

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Net income $ 155,166 $ 113,209 24 % 19 % 41,957 37 %

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

Cost of Revenues

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and outside services.

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.

The quarter-over-prior year quarter increase in cost of revenues of $0.2 million was primarily attributable to a $1.6 million increase in direct materials primarily driven by increased third-party data costs related to increased Scores revenue, partially offset by a $1.5 million decrease in travel activity due to COVID-19.

Cost of revenues as a percentage of revenues decreased to 27% during the quarter ended March 31, 2021 from 29% during the quarter ended March 31, 2020 primarily due to increased sales of our higher-margin Scores products.

The year-to-date period over period decrease in cost of revenues of $1.0 million was primarily attributable to a $3.6 million decrease in travel activity due to COVID-19, partially offset by a $2.9 million increase in direct materials primarily driven by increased third-party data costs related to increased Scores revenue.

Cost of revenues as a percentage of revenues decreased to 28% during the six months ended March 31, 2021 from 29% during the six months ended March 31, 2020, primarily due to increased sales of our higher-margin Scores products.

Research and Development

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The quarter-over-prior year quarter increase in research and development expenses of $4.2 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 was 13% during the quarter ended December 31, 2020, consistent with the quarter ended December 31, 2019.

Research and development expenses as a percentage of revenues was 13% during each of the quarters ended March 31, 2021 and March 31, 2020.

The year-to-date period over period increase in research and development expenses of $5.9 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 was 13% during each of the six months ended March 31, 2021 and March 31, 2020.

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 $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.

The quarter-over-prior year quarter decrease in selling, general and administrative expenses of $6.2 million was primarily attributable to a $2.7 million decrease in travel activity, a $2.1 million decrease in non-capitalizable commission cost, and a $2.1 million decrease in bad debt expense attributable to estimated losses for customers and industries most impacted by COVID-19 during the second quarter of our fiscal 2020.

Selling, general and administrative expenses as a percentage of revenues decreased to 29% during the quarter ended March 31, 2021 from 33% during the quarter ended March 31, 2020.

The year-to-date period over period decrease in selling, general and administrative expenses of $24.3 million was primarily attributable to a $7.6 million decrease in travel activity, a $4.5 million decrease in marketing costs primarily driven by a company-wide marketing event held during the first quarter of our fiscal 2020, a $4.7 million decrease in non-capitalizable commission cost, and a $2.1 million decrease in bad debt expense attributable to estimated losses for customers and industries most impacted by COVID-19 during the second quarter of our fiscal 2020.

Selling, general and administrative expenses as a percentage of revenues decreased to 30% during the six months ended March 31, 2021 from 36% during the six months ended March 31, 2020.

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.

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.

Amortization expense was $0.9 million during the quarter ended March 31, 2021 compared to $1.2 million during the quarter ended March 31, 2020.

Amortization expense was $1.9 million during the six months ended March 31, 2021 compared to $3.0 million during the six months ended March 31, 2020.

The decrease 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.

There were no restructuring expenses during the quarter and six months ended March 31, 2021.

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

During the six months ended March 31, 2020, 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;

The $7.3 million gain on the sale of product line assets during the six months ended March 31, 2021 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 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.

Interest expense includes 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.

The quarter-over-prior year quarter decrease in interest expense of $1.3 million was primarily attributable to a lower average outstanding debt balance during the quarter ended March 31, 2021.

The year-to-date period over period decrease in interest expense of $1.4 million was primarily attributable to a lower average outstanding debt balance during the six months ended March 31, 2021.

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 1.7% and (31.1)% during the quarters ended December 31, 2020 and 2019, respectively.

The quarter-over-prior year quarter increase in other income (expense), net of $2.6 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 period over period increase in other income (expense), net of $5.7 million was primarily attributable to an increase in net unrealized gains on our supplemental retirement and savings plan during the six months ended March 31, 2021.

Income Tax Provision (Benefit)

The effective income tax rates were 25.2% and 6.7% during the quarters ended March 31, 2021 and 2020, respectively, and 13.7% and (8.5)% during the six months ended March 31, 2021 and 2020, 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 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.

The effective tax rates for the six months ended March 31, 2021 and 2020 were both impacted by the recording of excess tax benefits relating to stock awards.

In addition, stock exercises during the quarter and six months ended March 31, 2020 resulted in an additional increase in excess benefits.

Operating Income

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

The following tables set forth certain summary information on a segment basis related to our operating income (loss) for the quarters and six-month periods ended March 31, 2021 and 2020:

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

Percentage Change

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Unallocated amortization expense (945) (1,202) 257 (21) %

Operating income $ 101,199 $ 75,726 25,473 34 %

Six Months Ended March 31, Period-to-Period Change Period-to-Period

Percentage Change

Segment 2021 2020

(In thousands) (In thousands)

Applications $ 62,874 $ 64,991 $ (2,117) (3) %

Scores 269,567 210,914 58,653 28 %

Decision Management Software (24,990) (28,267) 3,277 (12) %

Corporate expenses (63,645) (67,995) 4,350 (6) %

Total segment operating income 243,806 179,643 64,163 36 %

Unallocated share-based compensation (53,338) (45,933) (7,405) 16 %

Unallocated amortization expense (1,882) (2,998) 1,116 (37) %

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

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Quarter Ended

December 31, Percentage of

March 31, Percentage of

Revenues Six Months Ended

March 31, Percentage of

2021 2020 2021 2020 2021 2020 2021 2020

(In thousands)

(In thousands) (In thousands)

Segment revenues $ 129,514 $ 140,279 100 % 100 % $ 264,875 $ 292,457 100 % 100 %

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Quarter Ended

December 31, Percentage of

March 31, Percentage of

Revenues Six Months Ended

March 31, Percentage of

2021 2020 2021 2020 2021 2020 2021 2020

(In thousands)

(In thousands) (In thousands)

Segment revenues $ 168,719 $ 129,148 100 % 100 % $ 313,370 $ 244,286 100 % 100 %

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Quarter Ended

December 31, Percentage of

March 31, Percentage of

Revenues Six Months Ended

March 31, Percentage of

2021 2020 2021 2020 2021 2020 2021 2020

(In thousands)

(In thousands) (In thousands)

Segment revenues $ 33,128 $ 38,544 100 % 100 % $ 65,530 $ 69,732 100 % 100 %

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Segment operating loss $ (10,172) $ (8,810) (31) % (23) % $ (24,990) $ (28,267) (38) % (41) %

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 $25.5 million increase in operating income was primarily attributable to a $23.4 million increase in segment revenues, a $6.8 million decrease in segment operating expenses, and a $0.4 million decrease in corporate expenses, partially offset by a $5.4 million increase in share-based compensation cost.

At the segment level, the quarter-over-prior year quarter $30.6 million increase in segment operating income was the result of a $33.1 million increase in our Scores segment operating income and a $0.4 million decrease in corporate expenses, partially offset by a $1.5 million decrease in our Applications segment operating income and $1.4 million increase in our Decision Management Software segment operating loss.

The quarter-over-prior year quarter $1.5 million decrease in Applications segment operating income was due to a $10.8 million decrease in segment revenue, partially offset by a $9.3 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.

Segment operating margin for Applications during the quarter ended March 31, 2021 was 21%, consistent with the quarter ended March 31, 2020.

The quarter-over-prior year quarter $33.1 million increase in Scores segment operating income was due to a $39.6 million increase in segment revenue, partially offset by a $6.5 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.

Segment operating margin for Scores during the quarter ended March 31, 2021 was 87%, consistent with the quarter ended March 31, 2020.

The quarter-over-prior year quarter $1.4 million increase in Decision Management Software segment operating loss was due to a $5.4 million decrease in segment revenue, partially offset by a $4.0 million decrease in segment operating expenses.

Segment operating margin for Decision Management Software decreased to negative 31% from negative 23%, mainly due to a decrease in sales of our higher-margin software products.

The year-to-date period over period increase of $68.3 million in operating income was primarily attributable to a $37.3 million increase in segment revenues, a $22.6 million decrease in segment operating expenses, a $7.3 million gain on sale of product line assets, a $4.3 million decrease in corporate expenses, and a $3.1 million decrease in restructuring and impairment charges, partially offset by a $7.4 million increase in share-based compensation cost.

At the segment level, the year-to-date period over period increase of $64.2 million in segment operating income was the result of a $58.7 million increase in our Scores segment operating income, a $4.3 million decrease in corporate expenses, a $3.3 million decrease in our Decision Management Software segment operating loss, partially offset by a $2.1 million decrease in our Applications segment operating income.

The year-to-date period over period $2.1 million decrease in Applications segment operating income was due to a $27.6 million decrease in segment revenue, partially offset by a $25.5 million decrease in segment operating expenses.

Segment operating income as a percentage of segment revenue for Applications increased to 24% from 22%, 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 year-to-date period over period $58.7 million increase in Scores segment operating income was attributable to a $69.1 million increase in segment revenue, partially offset by a $10.4 million increase in segment operating expenses.

Segment operating margin for Scores during the six months ended March 31, 2021 was 86%, consistent with the six months ended March 31, 2020.

The year-to-date period over period $3.3 million decrease in Decision Management Software segment operating loss was attributable to a $7.5 million decrease in segment operating expenses, partially offset by a $4.2 million decrease in segment revenue.

Segment operating margin for Decision Management Software improved to negative 38% from negative 41%, primarily attributable to a decrease in travel activity due to COVID-19, as well as our strategic cost initiative implemented in September 2020 through which we reduced our workforce, consolidated office space and abandoned certain property and equipment.

CAPITAL RESOURCES AND LIQUIDITY

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.

As of March 31, 2021, we had $197.8 million in cash and cash equivalents, which included $124.8 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.

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Summary of Cash Flows

Quarter Ended December 31, Period-to-Period Change

Six Months Ended March 31, Period-to-Period Change

(In thousands)

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Effect of exchange rate changes on cash 4,021 (4,017) 8,038

Increase (decrease) in cash and cash equivalents $ (12,732) $ 4,790 (17,522)

Increase in cash and cash equivalents $ 40,442 $ 2,540 37,902

Cash Flows from Operating Activities

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 $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.

Net cash provided by operating activities increased to $231.5 million during the six months ended March 31, 2021 from $121.9 million during the six months ended March 31, 2020.

The $109.6 million increase was attributable to a $77.8 million increase that resulted from timing of receipts and payments in our ordinary course of business and a $42.0 million increase in net income, partially offset by a $10.2 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 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.

Net cash provided by investing activities was $1.7 million for the six months ended March 31, 2021 as compared to net cash used of $15.0 million for the six months ended March 31, 2020.

The $16.7 million change was primarily attributable to an $8.9 million decrease in purchases of property and equipment and $8.3 million in cash proceeds from the sale of product line assets for the six months ended March 31, 2021.

Cash Flows from Financing Activities

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.

Net cash used in financing activities increased to $196.8 million for the six months ended March 31, 2021 from $100.3 million for the six months ended March 31, 2020.

The $96.5 million increase was primarily attributable to a $350.0 million decrease in proceeds from issuance of senior notes and a $102.3 million increase in repurchases of common stock, partially offset by a $256.0 million decrease in payments on our revolving line of credit and a $95.0 million increase in proceeds from our revolving line of credit.

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 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.

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.

In March 2021, our Board of Directors approved a new stock repurchase program following the completion of the July 2020 program.

This new program is open-ended and authorizes repurchases of shares of our common stock up to an aggregate cost of $500.0 million in the open market or in negotiated transactions.

Pursuant to the July 2020 and March 2021 programs, we repurchased approximately 440,588 shares of our common stock at a total repurchase price of $205.2 million and 541,738 shares of our common stock at a total repurchase price of $255.2 million during the quarter and six months ended March 31, 2021, respectively.

Revolving Line of Credit

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

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.

As of March 31, 2021, we had $225.0 million in borrowings outstanding at a weighted-average interest rate of 1.236% 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”).

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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.

As of March 31, 2021, 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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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