Item 1. Financial Statements
Item 1. Financial Statements
FAIR ISAAC CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31,
2021 September 30, 2020
(In thousands, except par value data)
Assets
Current assets:
Cash and cash equivalents $ 197,836 $ 157,394
Accounts receivable, net 264,804 334,180
Prepaid expenses and other current assets 40,335 42,504
Assets held for sale 48,843 —
Total current assets 551,818 534,078
Marketable securities 30,437 25,513
Other investments 1,340 1,060
Property and equipment, net 34,897 46,419
Operating lease right-of-use assets 50,986 57,656
Goodwill 789,123 812,364
Intangible assets, net 7,437 9,236
Deferred income taxes 15,003 14,629
Other assets 98,567 105,285
Total assets $ 1,579,608 $ 1,606,240
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable $ 19,767 $ 23,033
Accrued compensation and employee benefits 71,347 117,952
Other accrued liabilities 60,062 63,367
Deferred revenue 100,396 115,159
Current maturities on debt 225,000 95,000
Liabilities related to assets held for sale 23,989 —
Total current liabilities 500,561 414,511
Long-term debt 740,226 739,435
Operating lease liabilities 59,100 73,207
Other liabilities 56,418 48,005
Total liabilities 1,356,305 1,275,158
Commitments and contingencies
Stockholders’ equity:
Preferred stock ($ 0.01 par value; 1,000 shares authorized; none issued and outstanding)
— —
Common stock ($ 0.01 par value; 200,000 shares authorized, 88,857 shares issued and 28,829 and 29,096 shares outstanding at March 31, 2021 and September 30, 2020, respectively)
288 291
Additional paid-in-capital 1,181,692 1,218,583
Treasury stock, at cost ( 60,028 and 59,761 shares at March 31, 2021 and September 30, 2020, respectively)
( 3,239,109 ) ( 2,997,856 )
Retained earnings 2,348,225 2,193,059
Accumulated other comprehensive loss ( 67,793 ) ( 82,995 )
Total stockholders’ equity 223,303 331,082
Total liabilities and stockholders’ equity $ 1,579,608 $ 1,606,240
See accompanying notes.
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FAIR ISAAC CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited)
Quarter Ended March 31, Six Months Ended March 31,
2021 2020 2021 2020
(In thousands, except per share data)
Revenues:
Transactional and maintenance $ 280,919 $ 240,702 $ 533,069 $ 461,076
Professional services 37,794 47,905 79,219 91,930
License 12,648 19,364 31,487 53,469
Total revenues 331,361 307,971 643,775 606,475
Operating expenses:
Cost of revenues 88,333 88,139 177,861 178,897
Research and development 43,612 39,439 84,263 78,382
Selling, general and administrative 97,272 103,465 191,183 215,486
Amortization of intangible assets 945 1,202 1,882 2,998
Restructuring and impairment charges — — — 3,104
Gain on sale of product line assets — — ( 7,334 ) —
Total operating expenses 230,162 232,245 447,855 478,867
Operating income 101,199 75,726 195,920 127,608
Interest expense, net ( 9,943 ) ( 11,254 ) ( 19,584 ) ( 21,022 )
Other income (expense), net 568 ( 2,008 ) 3,448 ( 2,227 )
Income before income taxes 91,824 62,464 179,784 104,359
Income tax provision (benefit) 23,150 4,176 24,618 ( 8,850 )
Net income 68,674 58,288 155,166 113,209
Other comprehensive gain (loss):
Foreign currency translation adjustments ( 1,846 ) ( 19,056 ) 15,202 ( 4,964 )
Comprehensive income $ 66,828 $ 39,232 $ 170,368 $ 108,245
Earnings per share:
Basic $ 2.36 $ 2.00 $ 5.33 $ 3.89
Diluted $ 2.33 $ 1.94 $ 5.23 $ 3.76
Shares used in computing earnings per share:
Basic 29,087 29,194 29,107 29,109
Diluted 29,531 29,985 29,660 30,076
See accompanying notes.
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FAIR ISAAC CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(Unaudited)
Common Stock Additional
Paid-in-Capital Treasury Stock Retained Earnings Accumulated Other
Comprehensive Loss Total
Stockholders’ Equity
(In thousands) Shares Par Value
Balance at December 31, 2020 29,236 $ 292 $ 1,145,893 $ ( 3,035,668 ) $ 2,279,551 $ ( 65,947 ) $ 324,121
Share-based compensation — — 28,206 — — — 28,206
Issuance of treasury stock under employee stock plans 34 — 7,593 1,766 — — 9,359
Repurchases of common stock ( 441 ) ( 4 ) — ( 205,207 ) — — ( 205,211 )
Net income — — — — 68,674 — 68,674
Foreign currency translation adjustments — — — — — ( 1,846 ) ( 1,846 )
Balance at March 31, 2021 28,829 $ 288 $ 1,181,692 $ ( 3,239,109 ) $ 2,348,225 $ ( 67,793 ) $ 223,303
Common Stock Additional
Paid-in-Capital Treasury Stock Retained Earnings Accumulated Other
Comprehensive Loss Total
Stockholders’ Equity
(In thousands) Shares Par Value
Balance at December 31, 2019 29,186 $ 292 $ 1,148,190 $ ( 2,843,097 ) $ 2,011,569 $ ( 75,993 ) $ 240,961
Share-based compensation — — 22,788 — — — 22,788
Issuance of treasury stock under employee stock plans 186 2 ( 1,761 ) 8,930 — — 7,171
Repurchases of common stock ( 290 ) ( 3 ) — ( 95,998 ) — — ( 96,001 )
Net income — — — — 58,288 — 58,288
Foreign currency translation adjustments — — — — — ( 19,056 ) ( 19,056 )
Balance at March 31, 2020 29,082 $ 291 $ 1,169,217 $ ( 2,930,165 ) $ 2,069,857 $ ( 95,049 ) $ 214,151
Common Stock Additional
Paid-in-Capital Treasury Stock Retained Earnings Accumulated Other
Comprehensive Loss Total
Stockholders’ Equity
(In thousands) Shares Par Value
Balance at September 30, 2020 29,096 $ 291 $ 1,218,583 $ ( 2,997,856 ) $ 2,193,059 $ ( 82,995 ) $ 331,082
Share-based compensation — — 53,338 — — — 53,338
Issuance of treasury stock under employee stock plans 275 2 ( 90,229 ) 13,964 — — ( 76,263 )
Repurchases of common stock ( 542 ) ( 5 ) — ( 255,217 ) — — ( 255,222 )
Net income — — — — 155,166 — 155,166
Foreign currency translation adjustments — — — — — 15,202 15,202
Balance at March 31, 2021 28,829 $ 288 $ 1,181,692 $ ( 3,239,109 ) $ 2,348,225 $ ( 67,793 ) $ 223,303
Common Stock Additional
Paid-in-Capital Treasury Stock Retained Earnings Accumulated Other
Comprehensive Loss Total
Stockholders’ Equity
(In thousands) Shares Par Value
Balance at September 30, 2019 28,944 $ 289 $ 1,225,365 $ ( 2,802,450 ) $ 1,956,648 $ ( 90,085 ) $ 289,767
Share-based compensation — — 45,933 — — — 45,933
Issuance of treasury stock under employee stock plans 596 6 ( 102,081 ) 28,291 — — ( 73,784 )
Repurchases of common stock ( 458 ) ( 4 ) — ( 156,006 ) — — ( 156,010 )
Net income — — — — 113,209 — 113,209
Foreign currency translation adjustments — — — — — ( 4,964 ) ( 4,964 )
Balance at March 31, 2020 29,082 $ 291 $ 1,169,217 $ ( 2,930,165 ) $ 2,069,857 $ ( 95,049 ) $ 214,151
See accompanying notes.
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FAIR ISAAC CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
Six Months Ended March 31,
2021 2020
(In thousands)
Cash flows from operating activities:
Net income $ 155,166 $ 113,209
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization 13,701 15,535
Share-based compensation 53,338 45,933
Deferred income taxes ( 287 ) ( 1,213 )
Net (gain) loss on marketable securities ( 2,669 ) 2,526
Non-cash operating lease costs 8,005 10,000
Provision for doubtful accounts, net 266 2,459
Net loss on sales and abandonment of property and equipment 96 59
Gain on sale of product line assets ( 7,334 ) —
Changes in operating assets and liabilities:
Accounts receivable 64,304 ( 13,823 )
Prepaid expenses and other assets 4,572 ( 19,656 )
Accounts payable ( 3,695 ) 1,833
Accrued compensation and employee benefits ( 46,147 ) ( 37,339 )
Other liabilities ( 9,989 ) ( 4,659 )
Deferred revenue 2,143 6,995
Net cash provided by operating activities 231,470 121,859
Cash flows from investing activities:
Purchases of property and equipment ( 4,220 ) ( 13,166 )
Proceeds from sales of marketable securities 2,264 3,385
Purchases of marketable securities ( 4,379 ) ( 5,232 )
Proceeds from sale of product line assets 8,291 —
(Purchase of) distribution from equity investment ( 210 ) 55
Net cash provided by (used in) investing activities 1,746 ( 14,958 )
Cash flows from financing activities:
Proceeds from revolving line of credit 251,000 156,000
Payments on revolving line of credit ( 121,000 ) ( 377,000 )
Proceeds from issuance of senior notes — 350,000
Payments on debt issuance costs — ( 6,840 )
Payments on finance leases ( 176 ) ( 712 )
Proceeds from issuance of treasury stock under employee stock plans 10,390 23,216
Taxes paid related to net share settlement of equity awards ( 86,653 ) ( 97,000 )
Repurchases of common stock ( 250,356 ) ( 148,008 )
Net cash used in financing activities ( 196,795 ) ( 100,344 )
Effect of exchange rate changes on cash 4,021 ( 4,017 )
Increase in cash and cash equivalents 40,442 2,540
Cash and cash equivalents, beginning of period 157,394 106,426
Cash and cash equivalents, end of period $ 197,836 $ 108,966
Supplemental disclosures of cash flow information:
Cash paid for income taxes, net of refunds of $ 288 and $ 1,538 during the six months ended March 31, 2021, and 2020, respectively
$ 18,131 $ 4,475
Cash paid for interest $ 18,488 $ 16,181
Supplemental disclosures of non-cash investing and financing activities:
Purchase of property and equipment included in accounts payable $ 388 $ 1,920
Unsettled repurchases of common stock $ 4,866 $ 8,002
Finance lease obligations incurred $ — $ 5,148
See accompanying notes.
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FAIR ISAAC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Nature of Business
Fair Isaac Corporation
Incorporated under the laws of the State of Delaware, Fair Isaac Corporation (“FICO”) is a provider of analytic, software and data management products and services that enable businesses to automate, improve and connect decisions. FICO provides a range of analytic solutions, credit scoring and credit account management products and services to banks, credit reporting agencies, credit card processing agencies, insurers, retailers, healthcare organizations and public agencies.
In this Quarterly Report on Form 10-Q, Fair Isaac Corporation is referred to as “FICO,” “we,” “us,” “our,” or “the Company.”
Principles of Consolidation and Basis of Presentation
We have prepared the accompanying unaudited interim condensed consolidated financial statements in accordance with the instructions to Form 10-Q and the applicable accounting guidance. Consequently, we have not necessarily included all information and footnotes required for audited financial statements. In our opinion, the accompanying unaudited interim condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments, except as otherwise indicated) necessary for a fair presentation of our financial position and results of operations. These unaudited condensed consolidated financial statements and notes thereto should be read in conjunction with our audited consolidated financial statements and notes thereto presented in our Annual Report on Form 10-K for the fiscal year ended September 30, 2020. The interim financial information contained in this report is not necessarily indicative of the results to be expected for any other interim period or for the entire fiscal year.
The condensed consolidated financial statements include the accounts of FICO and its subsidiaries. All intercompany accounts and transactions have been eliminated.
Use of Estimates
We make estimates and assumptions that affect the amounts reported in the financial statements and the disclosures made in the accompanying notes. For example, we use estimates in determining the collectibility of accounts receivable; the appropriate levels of various accruals; variable considerations included in the transaction price for our customer contracts; labor hours in connection with fixed-fee service contracts; the amount of our tax provision; and the realizability of deferred tax assets. We also use estimates in determining the remaining economic lives and carrying values of acquired intangible assets, property and equipment, and other long-lived assets. In addition, we use assumptions to estimate the fair value of reporting units and share-based compensation. Actual results may differ from our estimates.
As the impact of the COVID-19 pandemic continues to evolve, estimates and assumptions about future events and their effects cannot be determined with certainty and therefore require increased judgment. These estimates and assumptions may change in future periods and will be recognized in the condensed consolidated financial statements as new events occur and additional information becomes known. To the extent our actual results differ materially from those estimates and assumptions, our future financial statements could be affected. For more information, see Part II, Item 1A “Risk Factors” of this Quarterly Report on Form 10-Q.
New Accounting Pronouncements
Recently Adopted Accounting Pronouncements
In August 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2018-15, Intangibles—Goodwill and Other (Topic 350): Internal-Use Software (“ASU 2018-15”). 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. 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.
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In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments and subsequent amendments to the initial guidance: ASU 2018-19, ASU 2019-04, ASU 2019-05 and ASU 2019-11 (collectively, “Topic 326”). Topic 326 requires measurement and recognition of expected credit losses for financial assets held. 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.
2. Fair Value Measurements
Fair value is defined as the price that would be received from the sale of an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The accounting guidance establishes a three-level hierarchy for disclosure that is based on the extent and level of judgment used to estimate the fair value of assets and liabilities.
• Level 1 - uses unadjusted quoted prices that are available in active markets for identical assets or liabilities. Our Level 1 assets are comprised of money market funds and certain marketable securities. We did not have any liabilities that are valued using inputs identified under a Level 1 hierarchy as of March 31, 2021 and September 30, 2020.
• Level 2 - uses inputs other than quoted prices included in Level 1 that are either directly or indirectly observable through correlation with market data. These include quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; and inputs to valuation models or other pricing methodologies that do not require significant judgment because the inputs used in the model, such as interest rates and volatility, can be corroborated by readily observable market data. We did not have any assets that are valued using inputs identified under a Level 2 hierarchy as of March 31, 2021 and September 30, 2020. We measure the fair value of our senior notes based on Level 2 inputs, which include quoted market prices and interest rate spreads of similar securities.
• Level 3 - uses one or more significant inputs that are unobservable and supported by little or no market activity, and that reflect the use of significant management judgment. Level 3 assets and liabilities include those whose fair value measurements are determined using pricing models, discounted cash flow methodologies or similar valuation techniques, and significant management judgment or estimation. We did not have any assets or liabilities that are valued using inputs identified under a Level 3 hierarchy as of March 31, 2021 and September 30, 2020.
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The following tables represent financial assets that we measured at fair value on a recurring basis at March 31, 2021 and September 30, 2020:
March 31, 2021 Active Markets for
Identical Instruments
(Level 1) Fair Value as of March 31, 2021
(In thousands)
Assets:
Cash equivalents (1)
$ 194 $ 194
Marketable securities (2)
30,437 30,437
Total $ 30,631 $ 30,631
September 30, 2020 Active Markets for
Identical Instruments
(Level 1) Fair Value as of September 30, 2020
(In thousands)
Assets:
Cash equivalents (1)
$ 35,275 $ 35,275
Marketable securities (2)
25,513 25,513
Total $ 60,788 $ 60,788
(1) Included in cash and cash equivalents on our condensed consolidated balance sheets at March 31, 2021 and September 30, 2020. Not included in these tables are cash deposits of $ 197.6 million and $ 122.1 million at March 31, 2021 and September 30, 2020, respectively.
(2) Represents securities held under a supplemental retirement and savings plan for senior management employees, which are distributed upon termination or retirement of the employees. Included in marketable securities on our condensed consolidated balance sheets at March 31, 2021 and September 30, 2020.
See Note 7 for the fair value of our senior notes.
There were no transfers between Level 1, Level 2, and Level 3 of the fair value hierarchy during the quarters and six-month periods ended March 31, 2021 and 2020.
3. Derivative Financial Instruments
We use derivative instruments to manage risks caused by fluctuations in foreign exchange rates. The primary objective of our derivative instruments is to protect the value of foreign-currency-denominated receivable and cash balances from the effects of volatility in foreign exchange rates that might occur prior to conversion to their respective functional currencies. We principally utilize foreign currency forward contracts, which enable us to buy and sell foreign currencies in the future at fixed exchange rates and economically offset changes in foreign exchange rates. We routinely enter into contracts to offset exposures denominated in the British pound, Euro, and Singapore dollar.
Foreign-currency-denominated receivable and cash balances are remeasured at foreign exchange rates in effect on the balance sheet date with the effects of changes in foreign exchange rates reported in other income (expense), net. The forward contracts are not designated as hedges and are marked to market through other income (expense), net. Fair value changes in the forward contracts help mitigate the changes in the value of the remeasured receivable and cash balances attributable to changes in foreign exchange rates. The forward contracts are short-term in nature and typically have average maturities at inception of less than three months .
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The following tables summarize our outstanding foreign currency forward contracts, by currency, at March 31, 2021 and September 30, 2020:
March 31, 2021
Contract Amount Fair Value
Foreign
Currency USD USD
(In thousands)
Sell foreign currency:
Euro (EUR) EUR 19,200 $ 22,643 $ —
Buy foreign currency:
British pound (GBP) GBP 14,780 $ 20,400 $ —
Singapore dollar (SGD) SGD 5,790 $ 4,300 $ —
September 30, 2020
Contract Amount Fair Value
Foreign
Currency USD USD
(In thousands)
Sell foreign currency:
Euro (EUR) EUR 15,000 $ 17,656 $ —
Buy foreign currency:
British pound (GBP) GBP 16,555 $ 21,300 $ —
Singapore dollar (SGD) SGD 7,815 $ 5,700 $ —
The foreign currency forward contracts were entered into on March 31, 2021 and September 30, 2020, respectively; therefore, their fair value was $ 0 on each of these dates.
Gains (losses) on derivative financial instruments were recorded in our condensed consolidated statements of income and comprehensive income as a component of other income (expense), net, and consisted of the following:
Quarter Ended March 31, Six Months Ended March 31,
2021 2020 2021 2020
(In thousands)
Gains (losses) on foreign currency forward contracts $ 1,229 $ ( 2,194 ) $ 2,915 $ ( 1,049 )
4. Goodwill and Intangible Assets
Amortization expense associated with our intangible assets is reflected as a separate operating expense caption — amortization of intangible assets — and is excluded from cost of revenues and selling, general and administrative expenses within the accompanying condensed consolidated statements of income and comprehensive income. Amortization expense consisted of the following:
Quarter Ended March 31, Six Months Ended March 31,
2021 2020 2021 2020
(In thousands)
Completed technology $ 323 $ 463 $ 645 $ 1,038
Customer contracts and relationships 578 658 1,149 1,798
Trade names — 38 — 75
Non-compete agreements 44 43 88 87
Total $ 945 $ 1,202 $ 1,882 $ 2,998
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Estimated future intangible asset amortization expense associated with intangible assets existing at March 31, 2021 was as follows:
Year Ending September 30, (In thousands)
2021 (excluding the six months ended March 31, 2021) $ 1,804
2022 3,400
2023 1,316
2024 917
Total $ 7,437
The following table summarizes changes to goodwill during the six months ended March 31, 2021, both in total and as allocated to our segments:
Applications Scores Decision Management Software Total
(In thousands)
Balance at September 30, 2020 $ 596,804 $ 146,648 $ 68,912 $ 812,364
Foreign currency translation adjustment 3,679 — 1,040 4,719
Reclassified as assets held for sale ( 27,960 ) — — ( 27,960 )
Balance at March 31, 2021 $ 572,523 $ 146,648 $ 69,952 $ 789,123
5. Composition of Certain Financial Statement Captions
The following table presents the composition of property and equipment, net and other assets at March 31, 2021 and September 30, 2020:
March 31,
2021 September 30,
2020
(In thousands)
Property and equipment, net:
Property and equipment $ 154,749 $ 161,119
Less: accumulated depreciation and amortization ( 119,852 ) ( 114,700 )
Total $ 34,897 $ 46,419
Other assets:
Long-term receivables $ 45,994 $ 54,074
Prepaid commissions 40,598 38,579
Others 11,975 12,632
Total $ 98,567 $ 105,285
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6. Revolving Line of Credit
We have a $ 400 million unsecured revolving line of credit with a syndicate of banks that expires on May 8, 2023 with an option to increase it, subject to lender approval, by another $ 100 million. Proceeds from the credit facility can be used for working capital and general corporate purposes and may also be used for the refinancing of existing debt, acquisitions and the repurchase of our common stock. Interest on amounts borrowed under the credit facility is based on (i) a base rate, which is the greater of (a) the prime rate, (b) the Federal Funds rate plus 0.500 % and (c) the one-month LIBOR rate plus 1.000 %, plus, in each case, an applicable margin, or (ii) an adjusted LIBOR rate plus an applicable margin. The applicable margin for base rate borrowings ranges from 0 % to 0.875 % and for LIBOR borrowings ranges from 1.000 % to 1.875 %, and is determined based on our consolidated leverage ratio. In addition, we must pay credit facility fees. The credit facility contains certain restrictive covenants including 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 interest coverage ratio of 3.00 . The credit agreement also contains other covenants typical of unsecured facilities. As of March 31, 2021, we had $ 225.0 million in borrowings outstanding at a weighted-average interest rate of 1.236 % and were in compliance with all financial covenants under this credit facility.
7. Senior Notes
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 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 indentures for the Senior Notes contain certain covenants typical of unsecured obligations.
The following table presents the face values and fair values for the Senior Notes at March 31, 2021 and September 30, 2020:
March 31, 2021 September 30, 2020
Face Value (*) Fair Value Face Value (*) Fair Value
(In thousands)
The 2018 Senior Notes 400,000 442,000 400,000 442,000
The 2019 Senior Notes 350,000 357,000 350,000 358,750
Total $ 750,000 $ 799,000 $ 750,000 $ 800,750
(*) The carrying value of the Senior Notes was the face value reduced by the net debt issuance costs of $ 9.8 million and $ 10.6 million at March 31, 2021 and September 30, 2020, respectively.
8. Income Taxes
Effective Tax Rate
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 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.
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The total unrecognized tax benefit for uncertain tax positions was estimated to be $ 10.2 million and $ 8.0 million at March 31, 2021 and September 30, 2020, respectively. We recognize interest expense related to unrecognized tax benefits and penalties as part of the provision for income taxes in our condensed consolidated statements of income and comprehensive income. We accrued interest of $ 0.5 million and $ 0.4 million related to unrecognized tax benefits as of March 31, 2021 and September 30, 2020, respectively.
9. Earnings per Share
The following table presents reconciliations for the numerators and denominators of basic and diluted earnings per share (“EPS”) for the quarters and six-month periods ended March 31, 2021 and 2020:
Quarter Ended March 31, Six Months Ended March 31,
2021 2020 2021 2020
(In thousands, except per share data)
Numerator for diluted and basic earnings per share:
Net income $ 68,674 $ 58,288 $ 155,166 $ 113,209
Denominator - share:
Basic weighted-average shares 29,087 29,194 29,107 29,109
Effect of dilutive securities 444 791 553 967
Diluted weighted-average shares 29,531 29,985 29,660 30,076
Earnings per share:
Basic $ 2.36 $ 2.00 $ 5.33 $ 3.89
Diluted $ 2.33 $ 1.94 $ 5.23 $ 3.76
Anti-dilutive stock-based awards excluded from the calculations of diluted EPS were immaterial during the periods presented.
10. Segment Information
We are organized into the following three operating segments, each of which is a reportable segment, to align with internal management of our worldwide business operations based on product offerings.
• Applications. This segment includes decision management applications designed for a specific type of business problem or process — such as marketing, account origination, customer management, fraud, financial crimes compliance, collections and insurance claims management — as well as associated professional services. These applications are available to our customers as on-premises software, and many are available as hosted, software-as-a-service (“SaaS”) applications through the FICO ® Analytic Cloud or Amazon Web Services (“AWS”).
• Scores . This segment includes our business-to-business scoring solutions and services, our business-to-consumer scoring solutions and services including myFICO ® solutions for consumers, and associated professional services. Our scoring solutions give our clients access to analytics that can be easily integrated into their transaction streams and decision-making processes. Our scoring solutions and services are either distributed through major credit reporting agencies worldwide or sold to our clients directly.
• Decision Management Software. This segment is composed of analytic and decision management software tools that clients can use to create their own custom decision management applications, our FICO ® Decision Management Suite, as well as associated professional services. Some of our decision management software is currently delivered as part of the FICO ® Decision Management Platform and is increasingly being adopted to connect decisioning solutions or previously disconnected use cases. These tools are available to our customers as on-premises software, through the FICO ® Analytic Cloud or AWS.
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Our Chief Executive Officer evaluates segment financial performance based on segment revenues and segment operating income. Segment operating expenses consist of direct and indirect costs principally related to personnel, facilities, consulting, travel and depreciation. Indirect costs are allocated to the segments generally based on relative segment revenues, fixed rates established by management based upon estimated expense contribution levels and other assumptions that management considers reasonable. We do not allocate broad-based incentive expense, share-based compensation expense, restructuring expense, amortization expense, various corporate charges and certain other income and expense measures to our segments. These income and expense items are not allocated because they are not considered in evaluating the segment’s operating performance. Our Chief Executive Officer does not evaluate the financial performance of each segment based on its respective assets, nor capital expenditures where depreciation amounts are allocated to the segments from their internal cost centers as described above.
The following tables summarize segment information for the quarters and six-month periods ended March 31, 2021 and 2020:
Quarter Ended March 31, 2021
Applications Scores Decision Management Software Unallocated
Corporate
Expenses Total
(In thousands)
Segment revenues:
Transactional and maintenance $ 96,687 $ 167,212 $ 17,020 $ — $ 280,919
Professional services 27,627 703 9,464 — 37,794
License 5,200 804 6,644 — 12,648
Total segment revenues 129,514 168,719 33,128 — 331,361
Segment operating expense ( 102,142 ) ( 22,177 ) ( 43,300 ) ( 33,392 ) ( 201,011 )
Segment operating income (loss) $ 27,372 $ 146,542 $ ( 10,172 ) $ ( 33,392 ) 130,350
Unallocated share-based compensation expense ( 28,206 )
Unallocated amortization expense ( 945 )
Operating income 101,199
Unallocated interest expense, net ( 9,943 )
Unallocated other income, net 568
Income before income taxes $ 91,824
Depreciation expense $ 4,110 $ 167 $ 902 $ 45 $ 5,224
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Quarter Ended March 31, 2020
Applications Scores Decision Management Software Unallocated
Corporate
Expenses Total
(In thousands)
Segment revenues:
Transactional and maintenance $ 97,789 $ 127,610 $ 15,303 $ — $ 240,702
Professional services 35,134 819 11,952 — 47,905
License 7,356 719 11,289 — 19,364
Total segment revenues 140,279 129,148 38,544 — 307,971
Segment operating expense ( 111,456 ) ( 15,660 ) ( 47,354 ) ( 33,785 ) ( 208,255 )
Segment operating income (loss) $ 28,823 $ 113,488 $ ( 8,810 ) $ ( 33,785 ) 99,716
Unallocated share-based compensation expense ( 22,788 )
Unallocated amortization expense ( 1,202 )
Operating income 75,726
Unallocated interest expense, net ( 11,254 )
Unallocated other expense, net ( 2,008 )
Income before income taxes $ 62,464
Depreciation expense $ 4,553 $ 141 $ 1,158 $ 108 $ 5,960
Six Months Ended March 31, 2021
Applications Scores Decision Management Software Unallocated
Corporate
Expenses Total
(In thousands)
Segment revenues:
Transactional and maintenance $ 194,418 $ 305,802 $ 32,849 $ — $ 533,069
Professional services 58,232 820 20,167 — 79,219
License 12,225 6,748 12,514 — 31,487
Total segment revenues 264,875 313,370 65,530 — 643,775
Segment operating expense ( 202,001 ) ( 43,803 ) ( 90,520 ) ( 63,645 ) ( 399,969 )
Segment operating income (loss) $ 62,874 $ 269,567 $ ( 24,990 ) $ ( 63,645 ) 243,806
Unallocated share-based compensation expense ( 53,338 )
Unallocated amortization expense ( 1,882 )
Unallocated gain on sale of product line assets 7,334
Operating income 195,920
Unallocated interest expense, net ( 19,584 )
Unallocated other income, net 3,448
Income before income taxes $ 179,784
Depreciation expense $ 8,484 $ 361 $ 1,886 $ 78 $ 10,809
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Six Months Ended March 31, 2020
Applications Scores Decision Management Software Unallocated
Corporate
Expenses Total
(In thousands)
Segment revenues:
Transactional and maintenance $ 196,626 $ 235,056 $ 29,394 $ — $ 461,076
Professional services 69,157 1,083 21,690 — 91,930
License 26,674 8,147 18,648 — 53,469
Total segment revenues 292,457 244,286 69,732 — 606,475
Segment operating expense ( 227,466 ) ( 33,372 ) ( 97,999 ) ( 67,995 ) ( 426,832 )
Segment operating income (loss) $ 64,991 $ 210,914 $ ( 28,267 ) $ ( 67,995 ) 179,643
Unallocated share-based compensation expense ( 45,933 )
Unallocated amortization expense ( 2,998 )
Unallocated restructuring and impairment charges ( 3,104 )
Operating income 127,608
Unallocated interest expense, net ( 21,022 )
Unallocated other expense, net ( 2,227 )
Income before income taxes $ 104,359
Depreciation expense $ 8,902 $ 257 $ 2,144 $ 333 $ 11,636
Information about disaggregated revenue by product deployment methods was as follows:
Quarter Ended March 31, 2021
Reportable Segments On-Premises SaaS Scores Total Percentage
(Dollars in thousands)
Applications $ 66,182 $ 63,332 $ — $ 129,514 39 %
Scores — — 168,719 168,719 51 %
Decision Management Software 22,287 10,841 — 33,128 10 %
Total $ 88,469 $ 74,173 $ 168,719 $ 331,361 100 %
Quarter Ended March 31, 2020
Reportable Segments On-Premises SaaS Scores Total Percentage
(Dollars in thousands)
Applications $ 76,341 $ 63,938 $ — $ 140,279 46 %
Scores — — 129,148 129,148 42 %
Decision Management Software 28,847 9,697 — 38,544 12 %
Total $ 105,188 $ 73,635 $ 129,148 $ 307,971 100 %
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Six Months Ended March 31, 2021
Reportable Segments On-Premises SaaS Scores Total Percentage
(Dollars in thousands)
Applications $ 137,402 $ 127,473 $ — $ 264,875 41 %
Scores — — 313,370 313,370 49 %
Decision Management Software 45,065 20,465 — 65,530 10 %
Total $ 182,467 $ 147,938 $ 313,370 $ 643,775 100 %
Six Months Ended March 31, 2020
Reportable Segments On-Premises SaaS Scores Total Percentage
(Dollars in thousands)
Applications $ 162,319 $ 130,138 $ — $ 292,457 48 %
Scores — — 244,286 244,286 40 %
Decision Management Software 52,526 17,206 — 69,732 12 %
Total $ 214,845 $ 147,344 $ 244,286 $ 606,475 100 %
Information about disaggregated revenue by primary geographical markets was as follows:
Quarter Ended March 31, 2021
Reportable Segments North America Latin America Europe, Middle East and Africa Asia Pacific Total
(In thousands)
Applications $ 70,117 $ 9,112 $ 34,913 $ 15,372 $ 129,514
Scores 159,047 2,740 5,642 1,290 168,719
Decision Management Software 17,514 2,929 9,120 3,565 33,128
Total $ 246,678 $ 14,781 $ 49,675 $ 20,227 $ 331,361
Quarter Ended March 31, 2020
Reportable Segments North America Latin America Europe, Middle East and Africa Asia Pacific Total
(In thousands)
Applications $ 78,900 $ 9,672 $ 34,271 $ 17,436 $ 140,279
Scores 123,249 2,619 1,720 1,560 129,148
Decision Management Software 21,007 5,917 6,920 4,700 38,544
Total $ 223,156 $ 18,208 $ 42,911 $ 23,696 $ 307,971
Six Months Ended March 31, 2021
Reportable Segments North America Latin America Europe, Middle East and Africa Asia Pacific Total
(In thousands)
Applications $ 149,454 $ 18,339 $ 70,170 $ 26,912 $ 264,875
Scores 299,457 3,043 7,355 3,515 313,370
Decision Management Software 34,061 5,842 17,698 7,929 65,530
Total $ 482,972 $ 27,224 $ 95,223 $ 38,356 $ 643,775
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Six Months Ended March 31, 2020
Reportable Segments North America Latin America Europe, Middle East and Africa Asia Pacific Total
(In thousands)
Applications $ 164,366 $ 19,189 $ 74,055 $ 34,847 $ 292,457
Scores 233,446 2,903 3,258 4,679 244,286
Decision Management Software 36,594 10,250 14,185 8,703 69,732
Total $ 434,406 $ 32,342 $ 91,498 $ 48,229 $ 606,475
11 . Contract Balances and Performance Obligations
Contract Balances
We record a receivable when we satisfy a performance obligation prior to invoicing if only the passage of time is required before payment is due or if we have an unconditional right to consideration before we satisfy a performance obligation. We record a contract asset when we satisfy a performance obligation prior to invoicing but our right to consideration is conditional. We record deferred revenue when the payment is made or due before we satisfy a performance obligation.
Receivables at March 31, 2021 and September 30, 2020 consisted of the following:
March 31,
2021 September 30,
2020
(In thousands)
Billed $ 155,838 $ 211,776
Unbilled 159,891 181,550
315,729 393,326
Less: allowance for doubtful accounts ( 4,931 ) ( 5,072 )
Net receivables 310,798 388,254
Less: long-term receivables * ( 45,994 ) ( 54,074 )
Short-term receivables * $ 264,804 334,180
* Short-term receivables and long-term receivables were recorded in accounts receivable, net and other assets, respectively, within the accompanying condensed consolidated balance sheets.
Contract assets balance at March 31, 2021 and September 30, 2020 was immaterial.
Deferred revenue primarily relates to our maintenance and SaaS contracts billed annually in advance and generally recognized ratably over the term of the service period. Significant changes in the deferred revenues balances during the six months ended March 31, 2021 were as follows:
Six Months Ended
March 31, 2021
(In thousands)
Deferred revenues at September 30, 2020 * $ 122,141
Revenue recognized that was included in the deferred revenues balance at the beginning of the period ( 75,600 )
Increases due to billings, excluding amounts recognized as revenue during the period 78,945
Reclassified as liabilities related to assets held for sale $ ( 16,508 )
Deferred revenues at March 31, 2021 * $ 108,978
* Deferred revenues at September 30, 2020 included current portion of $ 115.2 million and long-term portion of $ 6.9 million that were recorded in deferred revenue and other liabilities, respectively, within the condensed consolidated balance sheets. Deferred revenues at March 31, 2021 included current portion of $ 100.4 million and long-term portion of $ 8.6 million that were recorded in deferred revenue and other liabilities, respectively, within the condensed consolidated balance sheets.
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Payment terms and conditions vary by contract type, although terms generally include a requirement of payment within 30 to 60 days. In instances where the timing of revenue recognition differs from the timing of invoicing, we have determined our contracts generally do not include a significant financing component. The primary purpose of our invoicing terms is to provide customers with simplified and predictable ways of purchasing our products and services, not to provide customers with financing or to receive financing from our customers. Examples include multi-year on-premises licenses that are invoiced annually with revenue recognized upfront, and invoicing at the beginning of a SaaS subscription term with revenue recognized ratably over the contract period.
Performance Obligations
Revenue allocated to remaining performance obligations represents contracted revenue that will be recognized in future periods, which is comprised of deferred revenue and amounts that will be invoiced and recognized as revenue in future periods. This does not include:
• Revenue that will be recognized in future periods from usage-based royalty from license sales;
• SaaS transactional revenue from variable considerations that will be recognized in the distinct service period during which it is earned; and
• Revenue from variable considerations that will be recognized in accordance with the “right-to-invoice” practical expedient, such as fees from our professional services billed based on a time and materials basis.
Revenue allocated to remaining performance obligations was $ 334.4 million as of March 31, 2021, of which we expect to recognize approximately 50 % over the next 20 months and the remainder thereafter.
12. Contingencies
We are in disputes with certain customers regarding amounts owed in connection with the sale of certain of our products and services. We also have had claims asserted by former employees relating to compensation and other employment matters. We are also involved in various other claims and legal actions arising in the ordinary course of business. We record litigation accruals for legal matters which are both probable and estimable. For legal proceedings for which there is a reasonable possibility of loss (meaning those losses for which the likelihood is more than remote but less than probable), we have determined we do not have material exposure on an aggregate basis.
13. Assets Held for Sale
As discussed in Note 14 - Subsequent Events, we entered into an agreement to divest our Collections and Recovery business (“C&R”) on May 4th, 2021. As a result of meeting the criteria to classify the disposal group as held for sale under ASC 360, Property, Plant, and Equipment, the C&R disposal group was classified as held for sale as of March 31, 2021. Assets classified as held for sale are recorded at the lower of their carrying amount or fair value less costs to sell and are not depreciated or amortized. Classification of a disposal group as held for sale occurs when sufficient authority to sell the disposal group has been obtained, the disposal group is available for immediate sale, and its sale is probable within one year. If at any time these criteria are no longer met, the disposal group would be reclassified as held and used. We evaluate the held for sale classification during each reporting period. The C&R disposal group did not meet the requirements for presentation as discontinued operations and is included in income from continuing operations for the three and six months ended March 31, 2021.
We did not have any assets held for sale as of September 30, 2020. The following table presents the carrying amounts of major classes of assets and liabilities related to assets held for sale with respect to the C&R disposal group as of March 31, 2021.
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March 31, 2021
(In thousands)
Assets:
Accounts receivable, net $ 18,310
Property and equipment, net 312
Goodwill 27,960
Operating lease right-of-use assets 2,261
Total assets held for sale $ 48,843
Liabilities:
Accounts payable $ 99
Accrued compensation and employee benefits 2,131
Deferred revenue 16,508
Operating lease liabilities 5,251
Total liabilities related to assets held for sale $ 23,989
14. Subsequent Events
On May 4th, 2021, we signed a definitive agreement to sell our C&R business. The transaction is expected to close in our current fiscal year, subject to customary closing conditions. The decision to sell the C&R business was the result of management’s decision to divest non-platform businesses and focus resources on the growth of our FICO Decision Management Platform. Our C&R business is part of the Applications segment.
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