FAIR ISAAC CORP 10-Q

Item 1. Financial Statements FAIR ISAAC CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) June 30, 2021 September 30, 2020 (In thousands, except par value data) Assets Current assets: Cash and cash equivalents $ 237,612 $ 157,394 Accounts receivable, net 280,598 334,180 Prepaid expenses and other current assets 38,670 42,504 Total current assets 556,880 534,078 Marketable securities 33,046 25,513 Other investments 1,348 1,060 Property and equipment, net 31,565 46,419 Operating lease right-of-use assets 49,250 57,656 Goodwill 793,185 812,364 Intangible assets, net 4,685 9,236 Deferred income taxes 25,711 14,629 Other assets 93,485 105,285 Total assets $ 1,589,155 $ 1,606,240 Liabilities and Stockholders’ Equity Current liabilities: Accounts payable $ 19,639 $ 23,033 Accrued compensation and employee benefits 92,363 117,952 Other accrued liabilities 83,010 63,367 Deferred revenue 99,757 115,159 Current maturities on debt 250,000 95,000 Total current liabilities 544,769 414,511 Long-term debt 806,622 739,435 Operating lease liabilities 56,815 73,207 Other liabilities 56,111 48,005 Total liabilities 1,464,317 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 28,386 and 29,096 shares outstanding at June 30, 2021 and September 30, 2020, respectively) 284 291 Additional paid-in-capital 1,171,164 1,218,583 Treasury stock, at cost ( 60,471 and 59,761 shares at June 30, 2021 and September 30, 2020, respectively) ( 3,482,483 ) ( 2,997,856 ) Retained earnings 2,499,423 2,193,059 Accumulated other comprehensive loss ( 63,550 ) ( 82,995 ) Total stockholders’ equity 124,838 331,082 Total liabilities and stockholders’ equity $ 1,589,155 $ 1,606,240 See accompanying notes. 1 Table of Contents FAIR ISAAC CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (Unaudited) Quarter Ended June 30, Nine Months Ended June 30, 2021 2020 2021 2020 (In thousands, except per share data) Revenues: Transactional and maintenance $ 288,078 $ 246,829 $ 821,147 $ 707,905 Professional services 35,918 43,633 115,137 135,563 License 14,188 23,269 45,675 76,738 Total revenues 338,184 313,731 981,959 920,206 Operating expenses: Cost of revenues 82,240 88,569 260,101 267,466 Research and development 45,826 41,411 130,089 119,793 Selling, general and administrative 107,729 99,832 298,912 315,318 Amortization of intangible assets 810 1,048 2,692 4,046 Restructuring and impairment charges — — — 3,104 Gains on product line asset sales and business divestiture ( 92,805 ) — ( 100,139 ) — Total operating expenses 143,800 230,860 591,655 709,727 Operating income 194,384 82,871 390,304 210,479 Interest expense, net ( 10,018 ) ( 11,223 ) ( 29,602 ) ( 32,245 ) Other income, net 3,526 4,560 6,974 2,333 Income before income taxes 187,892 76,208 367,676 180,567 Income tax provision 36,694 12,132 61,312 3,282 Net income 151,198 64,076 306,364 177,285 Other comprehensive gain (loss): Foreign currency translation adjustments 4,243 832 19,445 ( 4,132 ) Comprehensive income $ 155,441 $ 64,908 $ 325,809 $ 173,153 Earnings per share: Basic $ 5.27 $ 2.21 $ 10.58 $ 6.10 Diluted $ 5.18 $ 2.15 $ 10.38 $ 5.92 Shares used in computing earnings per share: Basic 28,687 29,005 28,967 29,075 Diluted 29,195 29,744 29,505 29,966 See accompanying notes. 2 Table of Contents 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 March 31, 2021 28,829 $ 288 $ 1,181,692 $ ( 3,239,109 ) $ 2,348,225 $ ( 67,793 ) $ 223,303 Share-based compensation — — 30,004 — — — 30,004 Issuance of treasury stock under employee stock plans 46 1 ( 532 ) 2,604 — — 2,073 Repurchases of common stock ( 489 ) ( 5 ) ( 40,000 ) ( 245,978 ) — — ( 285,983 ) Net income — — — — 151,198 — 151,198 Foreign currency translation adjustments — — — — — 4,243 4,243 Balance at June 30, 2021 28,386 $ 284 $ 1,171,164 $ ( 3,482,483 ) $ 2,499,423 $ ( 63,550 ) $ 124,838 Common Stock Additional Paid-in-Capital Treasury Stock Retained Earnings Accumulated Other Comprehensive Loss Total Stockholders’ Equity (In thousands) Shares Par Value Balance at March 31, 2020 29,082 $ 291 $ 1,169,217 $ ( 2,930,165 ) $ 2,069,857 $ ( 95,049 ) $ 214,151 Share-based compensation — — 22,264 — — — 22,264 Issuance of treasury stock under employee stock plans 74 1 ( 3,764 ) 3,716 — — ( 47 ) Repurchases of common stock ( 157 ) ( 2 ) — ( 53,988 ) — — ( 53,990 ) Net income — — — — 64,076 — 64,076 Foreign currency translation adjustments — — — — — 832 832 Balance at June 30, 2020 28,999 $ 290 $ 1,187,717 $ ( 2,980,437 ) $ 2,133,933 $ ( 94,217 ) $ 247,286 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 — — 83,342 — — — 83,342 Issuance of treasury stock under employee stock plans 321 3 ( 90,761 ) 16,568 — — ( 74,190 ) Repurchases of common stock ( 1,031 ) ( 10 ) ( 40,000 ) ( 501,195 ) — — ( 541,205 ) Net income — — — — 306,364 — 306,364 Foreign currency translation adjustments — — — — — 19,445 19,445 Balance at June 30, 2021 28,386 $ 284 $ 1,171,164 $ ( 3,482,483 ) $ 2,499,423 $ ( 63,550 ) $ 124,838 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 — — 68,197 — — — 68,197 Issuance of treasury stock under employee stock plans 670 7 ( 105,845 ) 32,007 — — ( 73,831 ) Repurchases of common stock ( 615 ) ( 6 ) — ( 209,994 ) — — ( 210,000 ) Net income — — — — 177,285 — 177,285 Foreign currency translation adjustments — — — — — ( 4,132 ) ( 4,132 ) Balance at June 30, 2020 28,999 $ 290 $ 1,187,717 $ ( 2,980,437 ) $ 2,133,933 $ ( 94,217 ) $ 247,286 See accompanying notes. 3 Table of Contents FAIR ISAAC CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Nine Months Ended June 30, 2021 2020 (In thousands) Cash flows from operating activities: Net income $ 306,364 $ 177,285 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 20,066 23,549 Share-based compensation 84,099 68,197 Deferred income taxes ( 11,064 ) ( 1,230 ) Net gain on marketable securities ( 4,706 ) ( 998 ) Non-cash operating lease costs 12,056 14,962 Provision for doubtful accounts, net 551 2,777 Net loss on sales and abandonment of property and equipment 107 61 Gains on product line asset sales and business divestiture ( 100,139 ) — Changes in operating assets and liabilities: Accounts receivable 56,655 ( 18,961 ) Prepaid expenses and other assets 5,172 ( 9,734 ) Accounts payable ( 4,165 ) ( 1,815 ) Accrued compensation and employee benefits ( 24,990 ) ( 10,147 ) Other liabilities ( 5,388 ) ( 12,330 ) Deferred revenue ( 2,556 ) ( 2,886 ) Net cash provided by operating activities 332,062 228,730 Cash flows from investing activities: Purchases of property and equipment ( 5,792 ) ( 21,073 ) Proceeds from sales of marketable securities 2,294 3,462 Purchases of marketable securities ( 5,121 ) ( 5,790 ) Proceeds from product line asset sales and business divestiture 146,428 — (Purchase of) distribution from equity investment ( 210 ) 55 Net cash provided by (used in) investing activities 137,599 ( 23,346 ) Cash flows from financing activities: Proceeds from revolving line of credit 429,000 193,000 Payments on revolving line of credit ( 208,000 ) ( 435,000 ) Proceeds from issuance of senior notes — 350,000 Payments on debt issuance costs — ( 6,840 ) Payments on finance leases ( 177 ) ( 811 ) Proceeds from issuance of treasury stock under employee stock plans 14,580 26,235 Taxes paid related to net share settlement of equity awards ( 88,770 ) ( 100,067 ) Repurchases of common stock including prepayment under accelerated share repurchase agreement ( 541,205 ) ( 210,000 ) Net cash used in financing activities ( 394,572 ) ( 183,483 ) Effect of exchange rate changes on cash 5,129 ( 2,654 ) Increase in cash and cash equivalents 80,218 19,247 Cash and cash equivalents, beginning of period 157,394 106,426 Cash and cash equivalents, end of period $ 237,612 $ 125,673 Supplemental disclosures of cash flow information: Cash paid for income taxes, net of refunds of $ 289 and $ 1,552 during the nine months ended June 30, 2021, and 2020, respectively $ 34,465 $ 5,723 Cash paid for interest $ 36,764 $ 34,844 Supplemental disclosures of non-cash investing and financing activities: Purchase of property and equipment included in accounts payable $ 564 $ 50 Finance lease obligations incurred $ — $ 6,489 See accompanying notes. 4 Table of Contents 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. 5 Table of Contents 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. Business Divestiture On May 4, 2021, we entered into a definitive agreement to sell our Collections and Recovery (“C&R”) business to Jonas Collections and Recovery Inc. (“Jonas”), a company in the Jonas Software operating group of Constellation Software Inc. The decision to sell the C&R business was the result of management’s decision to divest certain software products that are not built on the FICO Decision Management Platform. This divestiture will allow us to focus our development and go to market resources on the growth of our Decision Management Platform products. On June 7, 2021, we completed the sale to Jonas. As the C&R business has the input, process and output elements defined in Accounting Standards Codification 805, Business Combinations , we concluded the sale qualified as a sale of a business. The gain recognized from the sale was $ 92.8 million, which was recorded in gains on product line asset sales and business divestiture within the accompanying condensed consolidated statements of income and comprehensive income. Our C&R business was part of the Applications segment. 3. 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 June 30, 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 June 30, 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 June 30, 2021 and September 30, 2020. 6 Table of Contents The following tables represent financial assets that we measured at fair value on a recurring basis at June 30, 2021 and September 30, 2020: June 30, 2021 Active Markets for Identical Instruments (Level 1) Fair Value as of June 30, 2021 (In thousands) Assets: Cash equivalents (1) $ 194 $ 194 Marketable securities (2) 33,046 33,046 Total $ 33,240 $ 33,240 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 June 30, 2021 and September 30, 2020. Not included in these tables are cash deposits of $ 237.4 million and $ 122.1 million at June 30, 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 June 30, 2021 and September 30, 2020. See Note 8 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 nine-month periods ended June 30, 2021 and 2020. 4. 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, net. The forward contracts are not designated as hedges and are marked to market through other income, 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 . 7 Table of Contents The following tables summarize our outstanding foreign currency forward contracts, by currency, at June 30, 2021 and September 30, 2020: June 30, 2021 Contract Amount Fair Value Foreign Currency USD USD (In thousands) Sell foreign currency: Euro (EUR) EUR 16,600 $ 19,715 $ — Buy foreign currency: British pound (GBP) GBP 14,601 $ 20,300 $ — Singapore dollar (SGD) SGD 5,363 $ 4,000 $ — 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 June 30, 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, net, and consisted of the following: Quarter Ended June 30, Nine Months Ended June 30, 2021 2020 2021 2020 (In thousands) Gains (losses) on foreign currency forward contracts $ 88 $ ( 380 ) $ 3,003 $ ( 1,429 ) 5. 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 June 30, Nine Months Ended June 30, 2021 2020 2021 2020 (In thousands) Completed technology $ 257 $ 406 $ 902 $ 1,444 Customer contracts and relationships 510 561 1,659 2,359 Trade names — 37 — 112 Non-compete agreements 43 44 131 131 Total $ 810 $ 1,048 $ 2,692 $ 4,046 8 Table of Contents Estimated future intangible asset amortization expense associated with intangible assets existing at June 30, 2021 was as follows: Year Ending September 30, (In thousands) 2021 (excluding the nine months ended June 30, 2021) $ 563 2022 2,105 2023 1,100 2024 917 Total $ 4,685 The following table summarizes changes to goodwill during the nine months ended June 30, 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 5,265 — 1,152 6,417 C&R business divestiture $ ( 25,596 ) $ — $ — ( 25,596 ) Balance at June 30, 2021 $ 576,473 $ 146,648 $ 70,064 $ 793,185 6. Composition of Certain Financial Statement Captions The following table presents the composition of property and equipment, net and other assets at June 30, 2021 and September 30, 2020: June 30, 2021 September 30, 2020 (In thousands) Property and equipment, net: Property and equipment $ 153,879 $ 161,119 Less: accumulated depreciation and amortization ( 122,314 ) ( 114,700 ) Total $ 31,565 $ 46,419 Other assets: Long-term receivables $ 41,492 $ 54,074 Prepaid commissions 39,082 38,579 Other 12,911 12,632 Total $ 93,485 $ 105,285 9 Table of Contents 7. 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 June 30, 2021, we had $ 316.0 million in borrowings outstanding at a weighted-average interest rate of 1.216 % and were in compliance with all financial covenants under this credit facility. 8. 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 June 30, 2021 and September 30, 2020: June 30, 2021 September 30, 2020 Face Value (*) Fair Value Face Value (*) Fair Value (In thousands) The 2018 Senior Notes 400,000 449,000 400,000 442,000 The 2019 Senior Notes 350,000 359,625 350,000 358,750 Total $ 750,000 $ 808,625 $ 750,000 $ 800,750 (*) The carrying value of the Senior Notes was the face value reduced by the net debt issuance costs of $ 9.4 million and $ 10.6 million at June 30, 2021 and September 30, 2020, respectively. 9. Accelerated Share Repurchase We have authorization to make repurchases of shares of our common stock from time to time in the open market or in negotiated transactions. As part of the broader share repurchase program, we entered into an accelerated share repurchase agreement (“ASR Agreement”) with Wells Fargo on June 17, 2021 to repurchase $ 200.0 million of our common stock. The ASR Agreement was accounted for as two separate transactions (1) a repurchase of common stock and (2) an equity-linked contract on our own stock. Pursuant to the ASR Agreement, we paid $ 200.0 million to Wells Fargo and received an initial delivery of 319,400 shares of common stock, which approximated 80 percent of the total number of expected shares to be repurchased under the ASR Agreement. The final number of shares to be repurchased and the average price paid per share will be determined upon the expected settlement of the agreement during the fourth quarter of fiscal 2021. The final number of shares to be repurchased will be based on the volume-weighted average price of our common stock over the duration of the ASR Agreement, less a discount. The equity-linked contract for the remaining $ 40.0 million, representing remaining shares to be delivered by Wells Fargo under the ASR Agreement, was recorded as a reduction to stockholders’ equity as of June 30, 2021. 10 Table of Contents 10. Income Taxes Effective Tax Rate The effective income tax rates were 19.5 % and 15.9 % during the quarters ended June 30, 2021 and 2020, respectively, and 16.7 % and 1.8 % during the nine months ended June 30, 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 nine months ended June 30, 2021 and 2020 were both impacted favorably by the recording of excess tax benefits relating to stock awards. In addition, the effective tax rate for the nine months ended June 30, 2021 was increased by the tax impact of the gain on the sale of C&R business. The total unrecognized tax benefit for uncertain tax positions was estimated to be $ 12.1 million and $ 8.0 million at June 30, 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 $ 0.6 million and $ 0.4 million related to unrecognized tax benefits as of June 30, 2021 and September 30, 2020, respectively. 11. 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 nine-month periods ended June 30, 2021 and 2020: Quarter Ended June 30, Nine Months Ended June 30, 2021 2020 2021 2020 (In thousands, except per share data) Numerator for diluted and basic earnings per share: Net income $ 151,198 $ 64,076 $ 306,364 $ 177,285 Denominator - share: Basic weighted-average shares 28,687 29,005 28,967 29,075 Effect of dilutive securities 508 739 538 891 Diluted weighted-average shares 29,195 29,744 29,505 29,966 Earnings per share: Basic $ 5.27 $ 2.21 $ 10.58 $ 6.10 Diluted $ 5.18 $ 2.15 $ 10.38 $ 5.92 Anti-dilutive stock-based awards excluded from the calculations of diluted EPS were immaterial during the periods presented. 12. 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”). 11 Table of Contents • 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. 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 nine-month periods ended June 30, 2021 and 2020: Quarter Ended June 30, 2021 Applications Scores Decision Management Software Unallocated Corporate Expenses Total (In thousands) Segment revenues: Transactional and maintenance $ 99,822 $ 170,415 $ 17,841 $ — $ 288,078 Professional services 26,381 166 9,371 — 35,918 License 7,010 1,621 5,557 — 14,188 Total segment revenues 133,213 172,202 32,769 — 338,184 Segment operating expense ( 97,784 ) ( 25,418 ) ( 48,012 ) ( 33,820 ) ( 205,034 ) Segment operating income (loss) $ 35,429 $ 146,784 $ ( 15,243 ) $ ( 33,820 ) 133,150 Unallocated share-based compensation expense ( 30,761 ) Unallocated amortization expense ( 810 ) Unallocated gains on product line asset sales and business divestiture 92,805 Operating income 194,384 Unallocated interest expense, net ( 10,018 ) Unallocated other income, net 3,526 Income before income taxes $ 187,892 Depreciation expense $ 3,920 $ 159 $ 934 $ 38 $ 5,051 12 Table of Contents Quarter Ended June 30, 2020 Applications Scores Decision Management Software Unallocated Corporate Expenses Total (In thousands) Segment revenues: Transactional and maintenance $ 98,476 $ 130,268 $ 18,085 $ — $ 246,829 Professional services 32,364 58 11,211 — 43,633 License 10,620 1,224 11,425 — 23,269 Total segment revenues 141,460 131,550 40,721 — 313,731 Segment operating expense ( 111,061 ) ( 21,333 ) ( 43,839 ) ( 31,315 ) ( 207,548 ) Segment operating income (loss) $ 30,399 $ 110,217 $ ( 3,118 ) $ ( 31,315 ) 106,183 Unallocated share-based compensation expense ( 22,264 ) Unallocated amortization expense ( 1,048 ) Operating income 82,871 Unallocated interest expense, net ( 11,223 ) Unallocated other expense, net 4,560 Income before income taxes $ 76,208 Depreciation expense $ 5,091 $ 176 $ 1,156 $ 28 $ 6,451 Nine Months Ended June 30, 2021 Applications Scores Decision Management Software Unallocated Corporate Expenses Total (In thousands) Segment revenues: Transactional and maintenance $ 294,240 $ 476,217 $ 50,690 $ — $ 821,147 Professional services 84,613 986 29,538 — 115,137 License 19,235 8,369 18,071 — 45,675 Total segment revenues 398,088 485,572 98,299 — 981,959 Segment operating expense ( 299,785 ) ( 69,221 ) ( 138,532 ) ( 97,465 ) ( 605,003 ) Segment operating income (loss) $ 98,303 $ 416,351 $ ( 40,233 ) $ ( 97,465 ) 376,956 Unallocated share-based compensation expense ( 84,099 ) Unallocated amortization expense ( 2,692 ) Unallocated gains on product line asset sales and business divestiture 100,139 Operating income 390,304 Unallocated interest expense, net ( 29,602 ) Unallocated other income, net 6,974 Income before income taxes $ 367,676 Depreciation expense $ 12,404 $ 520 $ 2,820 $ 116 $ 15,860 13 Table of Contents Nine Months Ended June 30, 2020 Applications Scores Decision Management Software Unallocated Corporate Expenses Total (In thousands) Segment revenues: Transactional and maintenance $ 295,102 $ 365,324 $ 47,479 $ — $ 707,905 Professional services 101,521 1,141 32,901 — 135,563 License 37,294 9,371 30,073 — 76,738 Total segment revenues 433,917 375,836 110,453 — 920,206 Segment operating expense ( 338,527 ) ( 54,705 ) ( 141,838 ) ( 99,310 ) ( 634,380 ) Segment operating income (loss) $ 95,390 $ 321,131 $ ( 31,385 ) $ ( 99,310 ) 285,826 Unallocated share-based compensation expense ( 68,197 ) Unallocated amortization expense ( 4,046 ) Unallocated restructuring and impairment charges ( 3,104 ) Operating income 210,479 Unallocated interest expense, net ( 32,245 ) Unallocated other expense, net 2,333 Income before income taxes $ 180,567 Depreciation expense $ 13,993 $ 433 $ 3,300 $ 361 $ 18,087 Information about disaggregated revenue by product deployment methods was as follows: Quarter Ended June 30, 2021 Reportable Segments On-Premises SaaS Scores Total Percentage (Dollars in thousands) Applications $ 66,505 $ 66,708 $ — $ 133,213 39 % Scores — — 172,202 172,202 51 % Decision Management Software 20,519 12,250 — 32,769 10 % Total $ 87,024 $ 78,958 $ 172,202 $ 338,184 100 % Quarter Ended June 30, 2020 Reportable Segments On-Premises SaaS Scores Total Percentage (Dollars in thousands) Applications $ 76,493 $ 64,967 $ — $ 141,460 45 % Scores — — 131,550 131,550 42 % Decision Management Software 29,063 11,658 — 40,721 13 % Total $ 105,556 $ 76,625 $ 131,550 $ 313,731 100 % 14 Table of Contents Nine Months Ended June 30, 2021 Reportable Segments On-Premises SaaS Scores Total Percentage (Dollars in thousands) Applications $ 203,907 $ 194,181 $ — $ 398,088 41 % Scores — — 485,572 485,572 49 % Decision Management Software 65,584 32,715 — 98,299 10 % Total $ 269,491 $ 226,896 $ 485,572 $ 981,959 100 % Nine Months Ended June 30, 2020 Reportable Segments On-Premises SaaS Scores Total Percentage (Dollars in thousands) Applications $ 238,812 $ 195,105 $ — $ 433,917 47 % Scores — — 375,836 375,836 41 % Decision Management Software 81,589 28,864 — 110,453 12 % Total $ 320,401 $ 223,969 $ 375,836 $ 920,206 100 % Information about disaggregated revenue by primary geographical markets was as follows: Quarter Ended June 30, 2021 Reportable Segments North America Latin America Europe, Middle East and Africa Asia Pacific Total (In thousands) Applications $ 74,718 $ 10,883 $ 34,459 $ 13,153 $ 133,213 Scores 165,264 275 2,988 3,675 172,202 Decision Management Software 13,628 4,398 10,422 4,321 32,769 Total $ 253,610 $ 15,556 $ 47,869 $ 21,149 $ 338,184 Quarter Ended June 30, 2020 Reportable Segments North America Latin America Europe, Middle East and Africa Asia Pacific Total (In thousands) Applications $ 78,639 $ 12,069 $ 34,175 $ 16,577 $ 141,460 Scores 128,686 113 1,505 1,246 131,550 Decision Management Software 23,164 4,626 8,427 4,504 40,721 Total $ 230,489 $ 16,808 $ 44,107 $ 22,327 $ 313,731 Nine Months Ended June 30, 2021 Reportable Segments North America Latin America Europe, Middle East and Africa Asia Pacific Total (In thousands) Applications $ 224,172 $ 29,222 $ 104,629 $ 40,065 $ 398,088 Scores 464,721 3,318 10,343 7,190 485,572 Decision Management Software 47,689 10,240 28,120 12,250 98,299 Total $ 736,582 $ 42,780 $ 143,092 $ 59,505 $ 981,959 15 Table of Contents Nine Months Ended June 30, 2020 Reportable Segments North America Latin America Europe, Middle East and Africa Asia Pacific Total (In thousands) Applications $ 243,005 $ 31,258 $ 108,230 $ 51,424 $ 433,917 Scores 362,132 3,016 4,763 5,925 375,836 Decision Management Software 59,758 14,876 22,612 13,207 110,453 Total $ 664,895 $ 49,150 $ 135,605 $ 70,556 $ 920,206 13 . 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 June 30, 2021 and September 30, 2020 consisted of the following: June 30, 2021 September 30, 2020 (In thousands) Billed $ 157,777 $ 211,776 Unbilled 168,818 181,550 326,595 393,326 Less: allowance for doubtful accounts ( 4,505 ) ( 5,072 ) Net receivables 322,090 388,254 Less: long-term receivables * ( 41,492 ) ( 54,074 ) Short-term receivables * $ 280,598 334,180 * 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 June 30, 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 nine months ended June 30, 2021 were as follows: Nine Months Ended June 30, 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 ( 78,551 ) Increases due to billings, excluding amounts recognized as revenue during the period 78,658 Decrease due to divestiture of the C&R business ( 16,671 ) Deferred revenues at June 30, 2021 * $ 105,577 * 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 June 30, 2021 included current portion of $ 99.8 million and long-term portion of $ 5.8 million that were recorded in deferred revenue and other liabilities, respectively, within the condensed consolidated balance sheets. 16 Table of Contents 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 $ 54.9 million as of June 30, 2021, of which we expect to recognize approximately 50 % over the next 16 months and the remainder thereafter. 14. 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. 17 Table of Contents