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Item 7. Management’s Discussion and Analysis

2021-11-10 compared with 2020-11-12 · 275 added, 276 removed, 300 unchanged (65% of the section changed)

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Our Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) includes the following:

a business overview that provides a high-level summary of our strategies and initiatives, financial results and bookings trends that affect our business;

a business overview that provides a high-level summary of our strategies and initiatives, highlights from fiscal year 2021 and key performance metrics for our Software segment;

a more detailed analysis of our results of operations;

our liquidity and capital resources, which discusses key aspects of our statements of cash flows, changes in our balance sheets and our financial commitments;

our capital resources and liquidity, which discusses key aspects of our statements of cash flows, changes in our balance sheets and our financial commitments;

and a summary of our critical accounting policies and estimates we believe are important to understanding the assumptions and judgments incorporated in our reported financial results.

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Strategies and Initiatives

During fiscal 2020, we continued to advance our cloud-enabled, platform-based strategy in our Applications and Decision Management Software segments.

The application of this strategy has led to an increase in our cloud bookings over the past several years.

Our cloud bookings accounted for 41% of our total bookings in fiscal 2020, compared to 39% during fiscal 2019.

We have invested, and intend to continue to invest, in product development to build out and deliver features, functionalities and performance enhancements using a SaaS-based approach on our platform.

Our continued product innovation provides growth opportunities with customers that can benefit from the power, flexibility and modularity of these solutions.

For our Scores segment, our industry leading business-to-business FICO ® Scores have achieved a multi-year expansion in the growing U.S.

business-to-consumer market.

We have launched numerous new FICO ® Score-based products, and continue to grow our business-to-consumer partnership with Experian, a leading global information services provider.

This partnership provides consumers the FICO ® Score that lenders most commonly use in evaluating credit when determining applicant eligibility for new credit cards, car loans, mortgages or other lines of credit and can be accessed through Experian.com.

The FICO ® Score Open Access program, which allows our participating clients to provide their customers with a free FICO ® Score along with content to help them understand the FICO ® Score their lender uses, has more than 240 million consumer accounts with access to their free FICO ® Scores.

We continue to pursue additional partners to distribute FICO ® Scores with their product offerings sold directly to consumers.

During fiscal 2020, we announced the launch of the FICO ® Resilience Index, a new analytic tool designed to complement FICO ® Score models by identifying those consumers who are most resilient to economic stress relative to other consumers within the same FICO ® Score bands.

FICO ® Resilience Index would enable industry participants to more precisely assess credit risk and extend credit to more consumers throughout the economic cycle by managing the risk that emerges during periods of economic stress.

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

During fiscal 2020 , we repurchased approximately 0.7 million shares at a total repurchase price of $235.2 million .

In fiscal 2021, our B2B scoring solutions, including the flagship FICO ® Score, continued to be the standard measure of consumer credit risk in the U.S.

In January 2020 we introduced our most predictive scores, FICO ® Score 10 and 10T .

We also created the FICO ® Resilience Index, a complement to FICO Scores that identifies consumers who are more resilient to economic stress relative to other consumers within the same FICO Score bands.

We continued to develop scores that use alternative data to enhance conventional credit bureau data and generate scores for otherwise un-scorable consumers.

During fiscal 2021, we continued to advance our platform-first, cloud delivered strategy in our Software segment.

This led us to exit less strategic areas of our business in order to facilitate incremental investment in higher value, more strategic areas.

As part of this process, we divested the non-platform-based Collections and Recovery (“C&R”) business, sold all assets related to our cyber risk score operations, and sold certain assets related to our Software operations to an affiliated joint venture in China.

During fiscal 2020, we changed our business 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.

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

This change led to a negative impact of our revenue recognized from term software licenses in our fiscal 2021 but does not affect total revenue recognized over the life of a contract.

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

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

In June 2021, following the divestiture of our C&R business, we entered into an accelerated share repurchase agreement (“ASR Agreement”) to repurchase $200.0 million of our common stock.

In August 2021, we entered into a stock repurchase agreement with an institutional shareholder pursuant to which we repurchased $225.0 million of our common stock.

We also repurchased shares in other open market transactions under our stock repurchase programs.

During fiscal 2021, we repurchased 1.9 million shares at a total repurchase price of $882.2 million.

As of September 30, 2021, we had $173.2 million remaining under our current stock repurchase program.

As a strategic cost initiative in fiscal 2020, we committed to a course of action designed to reduce operating costs in lower value, less strategic areas of our business in order to facilitate incremental investment in higher value, more strategic areas while also reducing our facilities footprint in light of post-pandemic workforce patterns.

As a result of this initiative, in the fourth quarter of fiscal 2020, we recorded a net charge of $41.9 million consisting of impairment losses of $33.2 million on our operating lease assets, property and equipment related to closing or consolidating office spaces, as well as a restructuring charge of $8.7 million related to our workforce reduction.

We expect this course of action to result in an aggregate annual expense savings of approximately $36 million beginning in fiscal 2021.

In addition, 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 will be substantially completed by the end of the first quarter of our fiscal 2021.

This will shift 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.

We expect a decline in revenue recognized from term software licenses in fiscal 2021 as we transition to the new term license subscription model.

This change will not negatively impact our cash flows.

Overview of Financial Results

Total revenues for fiscal 2020 were $1.29 billion , an increase of 12% from $1.16 billion in fiscal 2019 .

We continue to drive growth in our Scores segment.

Scores revenue increased 25% to $528.5 million in fiscal 2020 from $421.2 million in fiscal 2019, and Scores operating income increased 26% to $454.3 million in fiscal 2020 from $361.4 million in fiscal 2019.

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

Revenue derived from our cloud-enabled SaaS business, which includes both subscription revenue and associated professional services revenue, increased 11% to $300.0 million during fiscal 2020, from $270.4 million during fiscal 2019.

SaaS subscription revenue increased 11% to $236.0 million during fiscal 2020, from $213.1 million during fiscal 2019.

We derive a significant portion of revenues internationally, and 32% and 34% of total consolidated revenues were derived from clients outside the U.S.

during fiscal 2020 and 2019 , respectively.

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

In addition, a significant share of our revenues come from transactional or unit-based software license fees, transactional fees 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 75% and 74% of our revenues during fiscal 2020 and 2019 , respectively.

Operating income for fiscal 2020 was $296.0 million , an increase of 17% from $253.5 million in fiscal 2019 .

Operating margin was 23% and 22% for fiscal 2020 and 2019, respectively.

Net income increased 23% to $236.4 million in fiscal 2020 from $192.1 million in fiscal 2019 primarily due to an increase in operating income.

Diluted earnings per share for fiscal 2020 was $7.90 , an increase of 25% from $6.34 in fiscal 2019 .

COVID-19 Update

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

and the world.

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

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

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

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

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

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

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

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

For our Scores segment, we have seen a decline in auto and unsecured originations volumes, but an increase in mortgage volume through the 2 nd half of fiscal 2020 due to strong refinancing activities boosted by low interest rates.

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

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

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

As a cost management initiative due to COVID-19, we accelerated reviews of our leased office spaces across our real estate portfolio to reshape and optimize our occupancy cost structures over the next several years.

As a result, in the fourth quarter of fiscal 2020 we recorded impairment charges of $33.2 million on operating lease assets, property and equipment related to closing or consolidating office spaces to better align with anticipated needs.

While we intend to continue to manage our costs by limiting the addition of new employees and third-party contracted services, and substantially reducing employee travel and other discretionary spending, to the extent the business disruption continues for an extended period, additional cost management actions will be considered and may become necessary.

Further asset impairment charges, increases in allowance for doubtful accounts, or restructuring charges may be required, depending on the severity and duration of the pandemic.

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

For more information, see Part I, Item 1A, Risk Factors , of this Annual Report on Form 10-K.

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

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

While we disclose estimated revenue expected to be recognized in the future related to unsatisfied performance obligations in Note 16 to the accompanying consolidated financial statements, we believe bookings amount is still a meaningful measure of our business as it includes estimated revenues omitted from Note 16, such as usage-based royalties derived from our software licenses, among others.

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

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

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

Actual revenue and the timing thereof could differ materially from our initial estimates.

Although many of our contracts contain non-cancelable terms, most of our bookings are transactional or service-related that depend upon estimates such as volume of transactions, number of active accounts, or number of hours incurred.

Since these estimates cannot be considered fixed or firm, we do not believe it is appropriate to characterize bookings as backlog.

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

Transactional and Maintenance Bookings

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

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

Due to the COVID-19 pandemic, we continue to conduct business with substantial modifications to employee travel and work locations and also the virtualization of sales and marketing events.

We expect these modifications to remain in place throughout calendar year 2021, along with substantially modified interactions with customers and suppliers, among other adjustments.

As certain offices reopened due to the lifting of local government restrictions and a small number of employees started returning to work locations on a limited basis during fiscal 2021, we have maintained a “Voluntary Work-From-Home Policy” providing our people with valued flexibility.

While we have not experienced material disruptions to our operations from the COVID-19 pandemic, we are unable to predict the full impact that the COVID-19 pandemic will have on our operations and future financial performance, including demand for our offerings, impact to our customers and partners, actions that may be taken by governmental authorities, and other factors identified in “Risk Factors” in Part I, Item 1A of this Report.

Highlights from Fiscal Year 2021

• Total GAAP revenue was $1.32 billion during fiscal year 2021, a 2% increase from fiscal year 2020.

• Total revenue for our Scores segment was $654.1 million during fiscal year 2021, a 24% increase from fiscal year 2020.

• Annual Recurring Revenue for our Software segment as of September 30, 2021 was $524.0 million, a 6% increase from September 30, 2020, excluding divestitures.

• Dollar-Based Net Retention Rate for our Software segment during the fourth quarter of fiscal 2021 was 106%, excluding divestitures.

• Cash and cash equivalents was $195.4 million as of September 30, 2021, compared with $157.4 million as of September 30, 2020.

• Operating income, which included $100.1 million gains on product line asset sales and business divestiture, was $505.5 million during fiscal year 2021, a 71% increase from fiscal 2020.

• Net income was $392.1 million during fiscal year 2021, a 66% increase from fiscal 2020.

• Cash flow from operations was $423.8 during fiscal year 2021, compared with $364.9 million generated during the prior year.

• Total debt balance was $1.268 billion as of September 30, 2021, compared with $845 million as of September 30, 2020.

• $882.2 million was spent on share repurchases, compared with $235.2 million spent during the prior year.

Key performance metrics for Software segment

Annual Contract Value Bookings (“ACV Bookings”)

Management regards ACV Bookings as an important indicator of future revenues, but they are not comparable to, nor are they a substitute for, an analysis of, our revenues.

We define ACV Bookings as the average annualized value of software contracts signed in the current reporting period that generate current and future on-premises and SaaS software revenue.

We only include contracts with an initial term of at least 24 months and we exclude perpetual licenses and other revenues that are non-recurring in nature.

For renewals of existing software subscription contracts, we count only incremental annual revenue expected over the current contract as ACV Bookings.

ACV Bookings is calculated by dividing the total expected contract value by the contract term in years.

The expected contract value equals the fixed amount — including guaranteed minimums — stated in the contract, plus estimates of future usage-based fees.

We develop estimates from discussions with our customers and examinations of historical data from similar products and customer arrangements.

Differences between estimated bookings and actual results occur due to variability in the volume of transactions or number of active accounts estimated.

Differences between estimates and actual results occur due to variability in the estimated usage.

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

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

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

Professional Services Bookings

We calculate professional services bookings as the estimated number of hours to complete a project multiplied by the rate per hour.

We estimate the number of hours based on our understanding of the project scope, conversations with customer personnel and our experience in estimating professional services projects.

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

License Bookings

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

Bookings Trend Analysis

over $1 Million

We disclose estimated revenue expected to be recognized in the future related to remaining performance obligations in Note 12 to the accompanying consolidated financial statements.

However, we believe ACV Bookings is a more meaningful measure of our business as it includes estimated revenues and future billings excluded from Note 12, such as usage-based fees and guaranteed minimums derived from our on-premises software licenses, among others.

The following table summarizes our ACV Bookings during the periods indicated:

Quarter Ended September 30, Year Ended September 30,

2021 2020 2021 2020

(In millions)

Quarter ended September 30, 2020

Quarter ended September 30, 2019

Year ended September 30, 2020

Year ended September 30, 2019

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

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

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

Transactional and maintenance bookings were 48% of total bookings for each of the years ended September 30, 2020 and 2019 .

Professional services bookings were 33% and 39% of total bookings for the years ended September 30, 2020 and 2019 , respectively.

License bookings were 19% and 13% of total bookings for the years ended September 30, 2020 and 2019 , respectively.

Total on-premises and SaaS software * $ 25.8 $ 28.9 $ 62.8 $ 58.3

(*) During fiscal 2021, we sold all assets related to our cyber risk score operations, sold certain assets related to our Software segment to an affiliated joint venture in China, and divested our C&R business.

The amounts above exclude these divested product lines and businesses for all periods presented.

Annual Recurring Revenue (“ARR”)

Accounting Standards Codification 606 requires us to recognize a significant portion of revenue from our on-premises software subscriptions at the point in time when the software is first made available to the customer, or at the beginning of the subscription term, despite the fact that our contracts typically call for billing these amounts ratably over the life of the subscription.

The remaining portion of our on-premises software subscription revenue including maintenance and usage-based fees are recognized over the life of the contract.

This point-in-time recognition of a portion of our on-premises software subscription revenue creates significant variability in the revenue recognized period to period based on the timing of the subscription start date and the subscription term.

Furthermore, this point-in-time revenue recognition can create a significant difference between the timing of our revenue recognition and the actual customer billing under the contract.

We use ARR to measure the underlying performance of our subscription-based contracts and mitigate the impact of this variability.

ARR is defined as the annualized revenue run-rate of on-premises and SaaS software agreements within a quarterly reporting period, and as such, is different from the timing and amount of revenue recognized.

All components of our software licensing and subscription arrangements that are not expected to recur (primarily perpetual licenses) are excluded.

We calculate ARR as the quarterly recurring revenue run-rate multiplied by four.

The following table summarizes our ARR at each of the dates presented:

December 31, 2019 March 31, 2020 June 30,

2020 September 30, 2020 December 31, 2020 March 31, 2021 June 30,

2021 September 30, 2021

(In millions)

Platform (**)

$ 40.0 $ 41.1 $ 43.8 $ 47.7 $ 55.1 $ 60.2 $ 67.7 $ 75.2

Non-Platform 446.9 450.3 438.5 443.6 439.9 437.1 445.9 448.8

Total on-premises and SaaS software $ 486.9 $ 491.4 $ 482.3 $ 491.3 $ 495.0 $ 497.3 $ 513.6 $ 524.0

Platform 8 % 8 % 9 % 10 % 11 % 12 % 13 % 14 %

Non-Platform 92 % 92 % 91 % 90 % 89 % 88 % 87 % 86 %

Total on-premises and SaaS software 100 % 100 % 100 % 100 % 100 % 100 % 100 % 100 %

Platform 45 % 48 % 44 % 45 % 38 % 47 % 54 % 58 %

Non-Platform 2 % 5 % (3) % (2) % (2) % (3) % 2 % 1 %

Total on-premises and SaaS software 5 % 7 % — % 1 % 2 % 1 % 7 % 7 %

The amounts above exclude these divested product lines and businesses for all periods presented.

(**) The FICO platform software is a set of interoperable services which use software assets owned and/or governed by FICO for building solutions and which conform to FICO architectural standards based on key elements of Cloud Native Computing design principles.

These standards encompass shared security context and pre-integration using FICO standard application programming interfaces for all services.

Dollar-Based Net Retention Rate (“DBNRR”)

We consider DBNRR to be an important measure of our success in retaining and growing revenue from our existing customers.

To calculate DBNRR for any period, we compare the ARR at the end of the prior comparable quarter (base ARR) to the ARR from that same cohort of customers at the end of the current quarter (retained ARR);

we then divide the retained ARR by the base ARR to arrive at the DBNRR.

Our calculation includes the positive impact among this cohort of customers of selling additional products, price increases and increases in usage-based fees, and the negative impact of customer attrition, price decreases and decreases in usage-based fees during the period.

However, the calculation does not include the positive impact from sales to any customers acquired during the period.

Our DBNRR may increase or decrease from period to period as a result of various factors, including the timing of new sales and customer renewal rates.

The following table summarizes our DBNRR for each of the periods presented:

Quarter Ended

December 31, 2019 March 31, 2020 June 30,

2020 September 30, 2020 December 31, 2020 March 31, 2021 June 30,

2021 September 30, 2021

Platform 110 % 112 % 108 % 116 % 123 % 130 % 137 % 143 %

Non-Platform 101 % 103 % 95 % 96 % 97 % 96 % 100 % 100 %

Total on-premises and SaaS software 103 % 105 % 98 % 99 % 100 % 100 % 105 % 106 %

The amounts above exclude these divested product lines and businesses for all periods presented.

RESULTS OF OPERATIONS

We are organized into the following three reportable segments:

Applications, Scores and Decision Management Software.

We are organized into the following two reportable segments:

Software and Scores.

Although we sell solutions and services into a large number of end user product and industry markets, our reportable business segments reflect the primary method in which management organizes and evaluates internal financial information to make operating decisions and assess performance.

Segment revenues, operating income, and related financial information, including disaggregation of revenue, for the years ended September 30, 2020, 2019 and 2018 are set forth in Note 15 to the accompanying consolidated financial statements.

During the fourth quarter of fiscal 2021, we reevaluated our operating segments to better align with how our chief operating decision maker (“CODM”) evaluates performance and allocates resources, which resulted in a change from three operating segments, Applications, Decision Management Software and Scores, to two operating segments, Software and Scores, by merging Applications and Decision Management Software segments into the new Software segment.

As a result, we modified the presentation of our segment financial information with retrospective application to all prior periods presented.

In addition, effective beginning in the fourth quarter of fiscal 2021, we changed the classification of revenue from transactional and maintenance, professional services, and license to on-premises and SaaS software, professional services and scores on our consolidated statements of income and comprehensive income, as well as our disclosures on disaggregation of revenue, to better align with our business strategy.

Previously reported amounts have been adjusted to conform to the current presentation.

Segment revenues, operating income, and related financial information, including disaggregation of revenue, for the years ended September 30, 2021, 2020 and 2019 are set forth in Note 12 and Note 18 to the accompanying consolidated financial statements.

The following tables set forth certain summary information on a segment basis related to our revenues for fiscal 2021, 2020 and 2019:

Year Ended September 30,

Period-to-Period Change

Period-to-Period

Year Ended September 30, Period-to-Period Change Period-to-Period

Percentage Change

(In thousands)

Decision Management Software

Segment 2021 2020 2019 2021 to 2020 2020 to 2019 2021 to 2020 2020 to 2019

(In thousands) (In thousands)

Scores $ 654,147 $ 528,547 $ 421,177 $ 125,600 $ 107,370 24 % 25 %

Software 662,389 766,015 738,906 (103,626) 27,109 (14) % 4 %

Total $ 1,316,536 $ 1,294,562 $ 1,160,083 21,974 134,479 2 % 12 %

Percentage of Revenues

Year Ended September 30,

Decision Management Software

Year Ended September 30,

Period-to-Period Change

Period-to-Period

Percentage Change

(In thousands)

Transactional and maintenance

Professional services

Applications segment revenues decreased $3.0 million in fiscal 2020 from 2019 primarily attributable to a $17.9 million decrease in our fraud solutions and a $3.1 million decrease in our customer communications services, partially offset by a $10.8 million increase in our compliance solutions and a $7.7 million increase in our originations solutions.

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

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

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

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

Applications segment revenues increased $40.7 million in fiscal 2019 from 2018 primarily due to a $50.6 million increase in our fraud solutions and a $7.3 million increase in our customer communication services, partially offset by an $8.7 million decrease in our customer management solutions and a $7.6 million decrease in our originations solutions.

The increase in fraud solutions was primarily attributable to an increase in license and transactional revenues.

The increase in customer communication services was primarily attributable to an increase in transactional revenue.

The decrease in customer management solutions was primarily attributable to a decrease in license and professional services revenues.

The decrease in originations solutions was primarily attributable to a decrease in professional services revenues.

Year Ended September 30,

Period-to-Period Change

Period-to-Period

Percentage Change

(In thousands)

Transactional and maintenance

Professional services

Scores segment revenues increased $107.4 million in fiscal 2020 from 2019 due to an increase of $79.8 million in our business-to-business scores revenue and $27.6 million in our business-to-consumer services revenue.

The increase in business-to-business scores was primarily attributable to an increase in mortgage volumes, a higher unit price in auto and unsecured originations, a large royalty true-up as well as a large annual license deal recognized during fiscal 2020.

Segment 2021 2020 2019

Scores 50 % 41 % 36 %

Software 50 % 59 % 64 %

Total 100 % 100 % 100 %

Scores segment revenues increased $125.6 million in fiscal 2021 from 2020 due to an increase of $64.6 million in our business-to-business scores revenue and $61.0 million in our business-to-consumer revenue.

The increase in business-to-business scores revenue was primarily attributable to a higher unit price across several business-to-business offerings, as well as higher volumes.

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

The increase in business-to-business scores was primarily attributable to an increase in mortgage volumes, a higher unit price across several business-to-business offerings, a large royalty true-up as well as a large annual license deal recognized during fiscal 2020.

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

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

Scores segment revenues increased $85.3 million in fiscal 2019 from 2018 due to an increase of $77.4 million in our business-to-business scores revenue and $7.9 million in our business-to-consumer services revenue.

The increase in business-to-business scores was primarily attributable to a higher unit price in mortgage and auto activities.

The increase in business-to-consumer services was primarily attributable to an increase in royalties derived from scores sold indirectly to consumers through credit reporting agencies.

During fiscal 2020, 2019 and 2018 , revenues generated from our agreements with Experian accounted for 14%, 13% and 11%, respectively, of our total revenues, and revenues generated from our agreements with Equifax and TransUnion together accounted for 18%, 16% and 14%, respectively, of our total revenues.

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

Decision Management Software

Year Ended September 30,

Period-to-Period Change

Period-to-Period

Revenues collectively generated by agreements with the three major consumer reporting agencies, TransUnion, Equifax and Experian, accounted for 38%, 33% and 29% of our total revenues in fiscal 2021, 2020 and 2019, respectively, with all three consumer reporting agencies contributing more than 10% of our total revenues in fiscal 2021, and Experian contributing more than 10% of our total revenues in fiscal 2020 and 2019.

Revenues from these customers included amounts recorded in our Software segment.

Year Ended September 30, Period-to-Period Change Period-to-Period

Percentage Change

(In thousands)

Transactional and maintenance

2021 2020 2019 2021 to 2020 2020 to 2019 2021 to 2020 2020 to 2019

(In thousands) (In thousands)

On-premises and SaaS software

$ 517,888 $ 584,576 $ 556,968 $ (66,688) $ 27,608 (11) % 5 %

Professional services 144,501 181,439 181,938 (36,938) (499) (20) % — %

Decision Management Software segment revenues increased $30.1 million in fiscal 2020 from 2019 primarily attributable to an increase in license revenue, as well as an increase in our SaaS subscription revenue classified as transactional and maintenance revenue.

Decision Management Software segment revenues increased $34.0 million in fiscal 2019 from 2018 primarily attributable to an increase in license revenue, an increase in professional services revenue, as well as an increase in our SaaS subscription revenue classified as transactional and maintenance revenue.

Total $ 662,389 $ 766,015 $ 738,906 (103,626) 27,109 (14) % 4 %

Year Ended September 30, Period-to-Period Change Period-to-Period

Percentage Change

2021 2020 2019 2021 to 2020 2020 to 2019 2021 to 2020 2020 to 2019

(In thousands) (In thousands)

Software recognized at a point time (1)

$ 59,024 $ 127,666 $ 111,308 $ (68,642) $ 16,358 (54) % 15 %

Software recognized over contract term (2)

458,864 456,910 445,660 1,954 11,250 — % 3 %

Total $ 517,888 $ 584,576 $ 556,968 $ (66,688) 27,608 (11) % 5 %

(1) Includes license portion of our on-premises subscription software and perpetual license, both of which are recognized when the software is made available to the customer, or at the start of the subscription.

(2) Includes maintenance portion and usage-based fees of our on-premises subscription software, maintenance revenue on perpetual licenses, as well as SaaS revenue.

Software segment revenues decreased $103.6 million in fiscal 2021 from 2020 due to a $66.7 million decrease in on-premises and SaaS software revenue and a $36.9 million decrease in services revenue.

The decrease in on-premises and SaaS software revenue was attributable to a $68.6 million decrease in revenue recognized at a point in time, partially offset by a $1.9 million increase in revenue recognized over time.

The decrease in point-in-time recognition was primarily attributable to the shift in the timing of revenue recognition on our term license subscription sales as a result of changing our business 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 fiscal 2021.

The increase in over-time recognition was primarily attributable to an increase in SaaS subscription revenue, partially offset by the divestiture of our C&R business in June 2021.

The decrease in services revenue was primarily due to our recent strategic shift to emphasize software over services, as well as the divestiture of our C&R business.

In total, $21.7 million of the year-over-year decrease in our Software segment revenue was attributable to the divestiture of our C&R business.

Software segment revenues increased $27.1 million in fiscal 2020 from 2019 primarily attributable to a $27.6 million increase in on-premises and SaaS software revenue, comprised of a $16.4 million increase in license portion of our on-premises subscription software and perpetual license revenue recognized at a point in time, and a $11.3 million increase in revenue recognized over time, primarily attributable to an increase in SaaS subscription revenue.

Operating Expenses and Other Income, Net

The following tables set forth certain summary information related to our consolidated statements of income and comprehensive income for fiscal 2021, 2020 and 2019:

Year Ended September 30,

Period-to-Period Change

Period-to-Period

Year Ended September 30, Period-to-Period Change Period-to-Period

Percentage Change

(In thousands, except employees)

(In thousands, except

2021 2020 2019 2021 to 2020 2020 to 2019 2021 to 2020 2020 to 2019

(In thousands, except employees) (In thousands, except

Revenues $ 1,316,536 $ 1,294,562 $ 1,160,083 $ 21,974 $ 134,479 2 % 12 %

Operating expenses:

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Restructuring and impairment charges 7,957 45,029 — (37,072) 45,029 (82) % — %

Gains on product line asset sales and business divestiture (100,139) — — (100,139) — — % — %

Total operating expenses 811,047 998,593 906,535 (87,407) 92,058 (9) % 10 %

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Provision for income taxes 81,058 20,589 23,948 60,469 (3,359) 294 % (14) %

Net income $ 392,084 $ 236,411 $ 192,124 155,673 44,287 66 % 23 %

Number of employees at fiscal year-end 3,650 4,003 4,009 (353) (6) (9) % — %

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Year Ended September 30,

2021 2020 2019

Revenues 100 % 100 % 100 %

Operating expenses:

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Restructuring and impairment charges 1 % 3 % — %

Gains on product line asset sales and business divestiture (7) % — % — %

Total operating expenses 62 % 77 % 78 %

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Provision for income taxes 6 % 2 % 2 %

Net income 30 % 18 % 17 %

Cost of Revenues

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

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

allocated overhead, facilities and data center costs;

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and outside services.

The fiscal 2021 from 2020 decrease of $28.7 million in cost of revenues was primarily attributable to an $18.8 million decrease in personnel and labor costs, a $9.2 million decrease in allocated facilities and infrastructure costs and a $3.7 million decrease in travel costs, partially offset by an increase in direct materials costs.

The decreases in personnel and labor costs, and in allocated facilities and infrastructure costs were both 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;

as well as the divestiture of our C&R business in June 2021.

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

The increase in direct materials costs was primarily attributable to increased third-party data costs related to increased Scores revenue.

Cost of revenues as a percentage of revenues decreased to 25% during fiscal 2021 from 28% during fiscal 2020, primarily due to increased sales of our higher-margin Scores products.

The fiscal 2020 over 2019 increase of $24.3 million in cost of revenues was primarily attributable to an $11.1 million increase in allocated facilities and infrastructure costs, a $10.3 million increase in personnel and labor costs and a $7.6 million increase in direct materials cost, partially offset by a $4.9 million decrease in travel costs.

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Cost of revenues as a percentage of revenues was 28% during fiscal 2020, materially consistent with that incurred during fiscal 2019.

The fiscal 2019 over 2018 increase of $23.9 million in cost of revenues expenses was primarily attributable to a $13.9 million increase in personnel and labor costs and a $6.7 million increase in facilities and infrastructure costs.

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

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

Cost of revenues as a percentage of revenues decreased to 29% during fiscal 2019 from 31% during fiscal 2018 primarily due to increased sales of our high-margin Scores and software products.

Research and Development

Research and development expenses include personnel and related overhead costs incurred in the development of new products and services, including research of mathematical and statistical models and development of new versions of Applications and Decision Management Software products.

The fiscal 2021 over 2020 increase of $4.7 million in research and development expenses was primarily attributable to an increase in personnel and labor costs, driven by increased average headcount and our continued investments in new product development.

Research and development expenses as a percentage of revenues was 13% during fiscal 2021, consistent with that during fiscal 2020.

The fiscal 2020 over 2019 increase of $17.0 million in research and development expenses was primarily attributable to an increase in personnel and labor costs and an increase in allocated facilities and infrastructure costs, both driven by increased average headcount and our continued investments in new product development.

Research and development expenses as a percentage of revenues was 13% during fiscal 2020, consistent with that incurred during fiscal 2019.

The fiscal 2019 over 2018 increase of $21.1 million in research and development expenses was primarily attributable to a $15.6 million increase in personnel and labor costs as a result of increased headcount, and a $3.5 million increase in facilities and infrastructure cost.

Research and development expenses as a percentage of revenues was 13% during fiscal 2019, consistent with that incurred during fiscal 2018.

Selling, General and Administrative

Selling, general and administrative expenses consist principally of employee salaries, commissions and benefits;

Selling, general and administrative expenses consist principally of employee salaries, incentives, commissions and benefits;

travel costs;

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legal expenses;

business development expenses;

and the cost of operating computer systems.

and business development expenses.

The fiscal 2021 from 2020 decrease in selling, general and administrative expenses of $24.6 million was primarily attributable to a $7.4 million decrease in travel costs, a $6.8 million decrease in marketing costs, a $5.0 million decrease in outside services, and a $4.6 million decrease in allocated facilities and infrastructure costs.

The decrease in travel costs was a result of a decrease in travel activity due to COVID-19.

The decrease in marketing costs was primarily driven by a company-wide marketing event during fiscal 2020.

The decrease in outside services was attributable to a decrease in legal and consulting fees associated with several company initiatives during fiscal 2020.

The decrease in allocated facilities and infrastructure costs was largely driven by our strategic cost initiative implemented in September 2020, in which we consolidated office space and abandoned certain property and equipment.

Selling, general and administrative expenses as a percentage of revenues decreased to 30% during fiscal 2021 from 33% during fiscal 2020 primarily due to increased sales of our high-margin Scores products.

The fiscal 2020 over 2019 increase of $6.8 million was primarily attributable to an increase in personnel and labor costs as a result of increased average headcount, higher share-based compensation and higher non-capitalizable commission cost.

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Selling, general and administrative expenses as a percentage of revenues decreased to 33% during fiscal 2020 from 35% during fiscal 2019 primarily due to increased sales of our high-margin Scores and software products.

The fiscal 2019 over 2018 increase of $37.2 million was primarily attributable to an increase in personnel and labor costs as a result of increased headcount, higher share-based compensation and higher non-capitalizable commission cost.

Selling, general and administrative expenses as a percentage of revenues decreased to 35% during fiscal 2019 from 37% during fiscal 2018 primarily due to increased sales of our high-margin Scores and software products.

Amortization of Intangible Assets

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Restructuring and Impairment Charges

During the fourth quarter of fiscal 2021, we incurred charges of $8.0 million in employee separation costs due to the elimination of 160 positions throughout the Company.

Cash payments for all the employee separation costs will be paid by the end of our fiscal 2022.

There were no impairment charges incurred during fiscal 2021.

During fiscal 2020, we incurred net charges totaling $45.0 million consisting of $28.0 million in impairment loss on operating lease assets, $5.2 million in impairment loss on abandonment of property and equipment and $11.8 million in restructuring charges.

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The restructuring charges related to employee separation costs as a result of eliminating 209 positions throughout the Company.

Cash payments for all the employee separation costs will be paid by the end of our fiscal 2021.

There were no restructuring and impairment charges incurred during fiscal 2019 and 2018.

Cash payments for all the employee separation costs were fully paid before the end of our fiscal 2021.

There were no restructuring and impairment charges incurred during fiscal 2019.

Gains on Product Line Asset Sales and Business Divestiture

The $100.1 million gain on product line asset sales and business divestiture during fiscal 2021 was attributable to a $92.8 million gain on the sale of the C&R business in June 2021, a $7.3 million gain on the sale of all assets related to our cyber risk score operations in October 2020, and the sale of certain assets related to our 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, as well as interest and credit facility fees on the revolving line of credit.

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.

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

The fiscal 2021 from 2020 decrease in net interest expense of $2.1 million was primarily attributable to a lower average outstanding debt balance during fiscal 2021.

The fiscal 2020 over 2019 increase in net interest expense of $2.4 million was primarily attributable to a higher average outstanding debt balance during fiscal 2020.

The fiscal 2019 over 2018 increase in net interest expense of $8.4 million was primarily attributable to a higher average outstanding debt balance during fiscal 2019, as well as a higher average interest rate on our 2018 Senior Notes compared to that on our revolving line of credit.

Other Income, Net

Other income, net consists primarily of realized investment gains/losses and unrealized gains/losses on certain investments classified as trading securities, exchange rate gains/losses resulting from re-measurement of foreign-currency-denominated receivable and cash balances held by our various reporting entities 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 fiscal 2021 over 2020 increase in other income, net of $4.5 million was primarily attributable to an increase in net unrealized gains on our supplemental retirement and savings plan, as well as a decrease in foreign currency exchange losses.

The fiscal 2020 over 2019 increase in other income, net of $0.9 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 fiscal 2019 over 2018 decrease in other income, net of $10.6 million was primarily attributable to a non-operating gain related to the divestiture of an investment during fiscal 2018.

Provision for Income Taxes

Our effective tax rates were 17.1%, 8.0% and 11.1% in fiscal 2021, 2020 and 2019, respectively.

The decrease in our income tax provision in fiscal 2020 compared to fiscal 2019 was due to the excess tax benefits related to stock-based compensation.

The decrease in our income tax provision in fiscal 2019 compared to fiscal 2018 was due to the decrease in the overall federal tax rate from the blended 24.5% in fiscal 2018 to 21% in fiscal 2019 and the recording of several one-time items in fiscal 2018 related to the enactment of the Tax Cuts and Jobs Act of 2017 (the “Tax Act”).

The increase in our income tax provision in fiscal 2021 compared to fiscal 2020 was due to an increase in pretax book income, of which a large amount was due to the gain on divestiture of C&R business, as well as a decrease in excess tax benefits related to share-based compensation.

The decrease in our income tax provision in fiscal 2020 compared to fiscal 2019 was due to the excess tax benefits related to share-based compensation.

As of September 30, 2021, we had approximately $141.5 million of unremitted earnings of non-U.S.

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from the foreign entities.

In the event these earnings are later remitted to the U.S., any estimated withholding tax on remittance of those earnings is expected to be immaterial to our income tax provision.

In the event these earnings are later remitted to the U.S., any estimated withholding tax and state income tax due upon remittance of those earnings is expected to be immaterial to the income tax provision.

Operating Income

The following tables set forth certain summary information on a segment basis related to our operating income for fiscal 2021, 2020 and 2019:

Year Ended September 30,

Period-to-Period

Year Ended September 30, Period-to-Period

Change Period-to-Period

Percentage Change

(In thousands)

Decision Management Software

Segment 2021 2020 2019 2021 to 2020 2020 to 2019 2021 to 2020 2020 to 2019

(In thousands) (In thousands)

Scores $ 560,684 $ 454,310 $ 361,356 $ 106,374 $ 92,954 23 % 26 %

Software 105,147 130,066 126,046 (24,919) 4,020 (19) % 3 %

Unallocated corporate expenses (136,812) (144,704) (144,755) 7,892 51 (5) % — %

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Unallocated restructuring and impairment charges (7,957) (45,029) — 37,072 (45,029) — % — %

Gains on product line asset sales and business divestiture 100,139 — — 100,139 — — % — %

Operating income $ 505,489 $ 295,969 $ 253,548 209,520 42,421 71 % 17 %

Year Ended September 30,

Percentage of Revenues

Year Ended September 30, Percentage of Revenues

2021 2020 2019 2021 2020 2019

(In thousands)

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Segment operating income $ 560,684 $ 454,310 $ 361,356 86 % 86 % 86 %

Year Ended September 30,

Percentage of Revenues

Year Ended September 30, Percentage of Revenues

2021 2020 2019 2021 2020 2019

(In thousands)

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Segment operating income $ 105,147 $ 130,066 $ 126,046 16 % 17 % 17 %

Decision Management Software

Year Ended September 30,

Percentage of Revenues

(In thousands)

Segment revenues

Segment operating expenses

Segment operating loss

The fiscal 2021 over 2020 increase in operating income of $209.5 million was primarily attributable to a $100.1 million gain on product line asset sales and business divestiture during fiscal 2021, a $59.5 million decrease in segment operating expenses, a $37.1 million decrease in restructuring and impairment charges, a $22.0 million increase in segment revenues and a $7.8 million decrease in corporate expenses, partially offset by an $18.8 million increase in share-based compensation expense.

At the segment level, the $89.3 million increase in segment operating income was the result of a $106.4 million increase in our Scores segment operating income and a $7.8 million decrease in corporate expenses, partially offset by a $24.9 million decrease in our Software segment operating income.

The $106.4 million increase in our Scores segment operating income was attributable to a $125.6 million increase in segment revenue, partially offset by a $19.2 million increase in segment operating expenses.

Segment operating income as a percentage of segment revenue for Scores was 86%, consistent with fiscal 2020.

The $24.9 million decrease in our Software segment operating income was attributable to a $103.6 million decrease in segment revenue, partially offset by a $78.7 million decrease in segment operating expenses.

Segment operating income as a percentage of segment revenue for Software was 16%, materially consistent with fiscal 2020.

The fiscal 2020 over 2019 increase in operating income of $42.4 million was attributable to a $134.5 million increase in segment revenues and a $1.1 million decrease in amortization expense, partially offset by a $45.0 million increase in restructuring and impairment charges, a $37.5 million increase in segment operating expenses, and a $10.7 million increase in share-based compensation expense.

At the segment level, the $97.0 million increase in segment operating income was the result of a $93.0 million increase in our Scores segment operating income and an $11.6 million decrease in our Decision Management Software segment operating loss, partially offset by a $7.6 million decrease in our Applications segment operating income.

The $7.6 million decrease in Applications segment operating income was attributable to a $4.6 million increase in segment operating expenses and a $3.0 million decrease in segment revenue.

Segment operating income as a percentage of segment revenue for Applications was 26%, materially consistent with fiscal 2019.

The $93.0 million increase in Scores segment operating income was attributable to a $107.4 million increase in segment revenue, partially offset by a $14.4 million increase in segment operating expenses.

At the segment level, the $97.0 million increase in segment operating income was the result of a $93.0 million increase in our Scores segment operating income and a $4.0 million increase in our Software segment operating income.

The $93.0 million increase in our Scores segment operating income was attributable to a $107.4 million increase in segment revenue, partially offset by a $14.4 million increase in segment operating expenses.

Segment operating income as a percentage of segment revenue for Scores was 86%, consistent with fiscal 2019.

The $11.6 million decrease in Decision Management Software segment operating loss was attributable to a $30.1 million increase in segment revenue, partially offset by an $18.5 million increase in segment operating expenses.

Segment operating margin for Decision Management Software improved to negative 14% from negative 26%, mainly due to an increase in sales of our higher-margin software products, partially offset by our continued investment in cloud infrastructure operations and new products.

The fiscal 2019 over 2018 increase in operating income of $78.2 million was attributable to a $160.0 million increase in segment revenues and a $0.5 million decrease in amortization expense, partially offset by a $54.6 million increase in segment operating expenses, a $19.5 million increase in unallocated corporate expenses and an $8.2 million increase in share-based compensation expense.

At the segment level, the $85.9 million increase in segment operating income was the result of an $88.9 million increase in our Scores segment operating income and a $17.2 million increase in our Applications segment operating income, partially offset by a $19.5 million increase in unallocated corporate expenses primarily driven by an increase in unallocated incentive cost and a $0.7 million increase in our Decision Management Software segment operating loss.

The $17.2 million increase in Applications segment operating income was attributable to a $40.7 million increase in segment revenue, partially offset by a $23.5 million increase in segment operating expenses.

Segment operating income as a percentage of segment revenue for Applications increased to 27% from 26% mainly due to an increase in sales of our higher-margin software products.

The $88.9 million increase in Scores segment operating income was attributable to an $85.3 million increase in segment revenue as well as a $3.6 million decrease in segment operating expenses.

Segment operating income as a percentage of segment revenue for Scores increased to 86% from 81% mainly due to an increase in sales of our higher-margin score products.

The $0.7 million increase in Decision Management Software segment operating loss was attributable to a $34.7 million increase in segment operating expenses, partially offset by a $34.0 million increase in segment revenue.

Segment operating margin for Decision Management Software improved to negative 26% from negative 34% mainly due to an increase in sales of our higher-margin software products, partially offset by our continued investment in cloud infrastructure operations and new products.

The $4.0 million increase in our Software segment operating income was attributable to a $27.1 million increase in segment revenue, partially offset by a $23.1 million increase in segment operating expenses.

Segment operating income as a percentage of segment revenue for Software was 17%, consistent with fiscal 2019.

CAPITAL RESOURCES AND LIQUIDITY

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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 I, Item 1A titled “Risk Factors” of this Annual Report on Form 10-K.

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

However, based on our current business plan and revenue prospects, we believe our cash and cash equivalents balances, as well as available borrowings from our $600 million revolving line of credit and anticipated cash flows from operating activities, will be sufficient to fund our working and other capital requirements for at least the next 12 months and thereafter for the foreseeable future.

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

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Year Ended September 30,

2021 2020 2019

(In thousands)

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Effect of exchange rate changes on cash (136) 59 (1,140)

Increase (decrease) in cash and cash equivalents

Increase in cash and cash equivalents $ 37,960 $ 50,968 $ 16,403

Cash Flows from Operating Activities

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Net cash provided by operating activities totaled $423.8 million in fiscal 2021 compared to $364.9 million in fiscal 2020.

The $104.5 million increase was attributable to a $44.3 million increase in net income, a $46.1 million increase in non-cash items, including a $28.0 million increase in impairment loss on operating lease assets as well as a $20.0 million increase in operating lease costs, and a $14.2 million increase that resulted from timing of receipts and payments in our ordinary course of business.

The $58.9 million increase was primarily attributable to a $155.7 million increase in net income and a $28.6 million increase that resulted from timing of receipts and payments in our ordinary course of business, partially offset by a $125.4 million decrease in non-cash items, including a $100.1 million gain on product line asset sales and a business divestiture in fiscal 2021.

Net cash provided by operating activities totaled $364.9 million in fiscal 2020 compared to $260.4 million in fiscal 2019.

The $37.3 million increase was attributable to a $65.6 increase in net income as well as an $18.7 million increase in non-cash items, partially offset by a $47.0 million decrease that resulted from timing of receipts and payments in our ordinary course of business.

Cash Flows from Investing Activities

Net cash provided by investing activities totaled $137.9 million in fiscal 2021 compared to net cash used of $24.6 million in fiscal 2020.

The $162.5 million change was primarily attributable to $147.4 million in cash proceeds from the product line asset sales and a business divestiture during fiscal 2021 and a $14.4 million decrease in purchases of property and equipment.

Net cash used in investing activities totaled $24.6 million in fiscal 2020 compared to $42.8 million in fiscal 2019.

The $18.2 million decrease was primarily attributable to a $15.9 million decrease in net cash used for acquisitions and a $2.0 million decrease in net cash used for purchases of property and equipment.

Net cash used in investing activities totaled $42.8 million in fiscal 2019 compared to $14.1 million in fiscal 2018.

The $28.7 million increase was primarily attributable to a $20.0 million decrease in proceeds from the sale of cost method investment and a $15.9 million increase in net cash used for acquisitions, partially offset by a $7.3 million decrease in net cash used for purchases of property and equipment.

Cash Flows from Financing Activities

Net cash used in financing activities totaled $523.6 million in fiscal 2021 compared to $289.4 million in fiscal 2020.

The $89.4 million increase was primarily due to a $338.0 million increase in payments, net of proceeds, on our revolving line of credit and a $49.9 million increase in taxes paid related to net share settlement of equity awards, partially offset by a $293.0 million increase in proceeds, net of payments, from our senior notes.

The $234.2 million increase was primarily attributable to a $639.0 million increase in repurchases of common stock and a $350.0 million decrease in proceeds from issuance of senior notes, partially offset by a $419.0 million increase in proceeds from our revolving line of credit, a $254.0 million decrease in payments on our revolving line of credit, and an $85.0 million decrease in payments on senior notes.

Net cash used in financing activities totaled $289.4 million in fiscal 2020 compared to $200.0 million in fiscal 2019.

The $18.6 million decrease was primarily due to a $192.0 million decrease in payments, net of proceeds, on our revolving line of credit, a $113.7 million decrease in net cash used for repurchases of common stock and an $11.8 million increase in proceeds from issuance of treasury stock under employee stock plans, partially offset by a $297.0 million decrease in proceeds, net of payments, from our senior notes.

Repurchases of Common Stock

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

As of September 30, 2020 , we had $224.8 million remaining under this authorization.

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

This program was open-ended and authorized repurchases of shares of our common stock up to an aggregate cost of $500.0 million 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 a financial institution in June 2021 to repurchase $200.0 million of our common stock.

Pursuant to the ASR Agreement, we paid $200.0 million to the financial institution and received an initial delivery of 319,400 shares of common stock, which approximated 80% of the total number of expected shares to be repurchased under the ASR Agreement.

In August 2021, we settled the ASR Agreement and received 70,127 additional shares.

In total, 389,527 shares were repurchased under the ASR Agreement.

In August 2021, our Board of Directors approved a new stock repurchase program following the termination of the March 2021 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.

In August 2021, we entered into a stock repurchase agreement with an institutional shareholder, pursuant to which we repurchased 515,293 shares of our common stock for $225.0 million.

As of September 30, 2021, we had $173.2 million remaining under our current stock repurchase program.

During fiscal 2021, 2020 and 2019, we expended $882.2 million, $235.2 million and $228.9 million, respectively, under these and previously authorized stock repurchase programs.

Revolving Line of Credit

On May 8, 2018, we amended our credit agreement with a syndicate of banks, extending the maturity date of the unsecured revolving line of credit from December 30, 2019 to May 8, 2023, while reducing our borrowing capacity to $400 million with an option to increase it 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.

On August 19, 2021, we amended our credit agreement with a syndicate of banks, increasing our borrowing capacity under the unsecured revolving line of credit to $600 million, and extended its maturity to August 19, 2026.

Borrowings under 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) an adjusted base rate, which is the greatest of (a) the prime rate and (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 0.750% and for LIBOR borrowings ranges from 1.000% to 1.750% and is determined based on our consolidated leverage ratio.

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The credit facility contains certain restrictive covenants including maintaining a maximum consolidated leverage ratio of 3.50, subject to a step up to 4.00 following certain permitted acquisitions;

and a minimum fixed charge ratio of 2.50 through the maturity of our 2010 Senior Notes (as defined below) in July 2020, following which maintaining a minimum interest coverage ratio of 3.00 is required.

and a minimum interest coverage ratio of 3.00.

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

As of September 30, 2021, we had $518.0 million in borrowings outstanding at a weighted-average interest rate of 1.212% and we were in compliance with all financial covenants under this credit facility.

On July 14, 2010, we issued $245 million of senior notes in a private placement to a group of institutional investors, the outstanding aggregate principal amount of which was paid in full at maturity on July 14, 2020 (the “2010 Senior Notes”).

On October 20, 2021, we entered into an amendment to our credit agreement that provides for an unsecured term loan that will mature on August 19, 2026 in the aggregate principal amount of $300 million, with an option for us to request additional incremental term loans from time to time, in each case subject to the terms and conditions of the credit agreement.

The term loan is in addition to the $600 million revolving loan facility.

The term loan is subject to the same pricing and covenants as the revolving line of credit.

We are obligated to repay the term loan in consecutive quarterly installments equal to $3.75 million commencing March 31, 2022, subject to certain adjustments under the credit agreement.

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,” along with the 2010 Senior Notes and 2018 Senior Notes, the “Senior Notes”).

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

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

The indentures for the 2018 Senior Notes and the 2019 Senior Notes contain certain covenants typical of unsecured obligations.

As of September 30, 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 September 30, 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 we do not believe we are at material risk of not meeting these covenants due to COVID-19.

Contractual Obligations

The following table presents a summary of our contractual obligations at September 30, 2021:

Year Ending September 30,

Year Ending September 30, Thereafter Total

2022 2023 2024 2025 2026

(In thousands)

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Interest due on debt obligations (2) 35,000 35,000 35,000 35,000 35,000 28,000 203,000

Finance lease obligations

Operating lease obligations 24,441 19,621 14,025 8,639 7,602 7,522 81,850

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As we are not able to reasonably estimate the timing of the payments or the amount by which the liability will increase or decrease over time, the related balances have not been reflected in the section of the table showing payment by fiscal year.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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Contracts with Customers

Our revenue is primarily derived from term-based or perpetual licensing of software and scoring products and solutions, and associated maintenance;

SaaS subscription services;

scoring and credit monitoring services for consumers;

and professional services.

Our revenue is primarily derived from on-premises software and SaaS subscriptions, professional services and scoring services.

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

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

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

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

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

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

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

Revenue allocated to maintenance is generally recognized ratably over the contract period as customers simultaneously consume and receive benefits.

In addition to usage-based royalty on our software and scoring products, transactional revenue is also derived from SaaS contracts in which we provide customers with access to and standard support for our software application either in the FICO ® Analytic Cloud or AWS, our primary cloud infrastructure provider, on a subscription basis.

The transaction price typically includes a fixed consideration in the form of a guaranteed minimum that allows up to a certain level of usage and a variable consideration in the form of usage or transaction-based fees in excess of the minimum threshold;

or usage or transaction-based variable amount not subject to a minimum threshold.

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

Our on-premises software is primarily sold on a subscription basis, which includes a term-based license and post-contract support or maintenance, both of which generally represent distinct performance obligations and are accounted for separately.

The transaction price is either a fixed fee, or a usage-based fee — sometimes subject to a guaranteed minimum.

When the amount is fixed, including the guaranteed minimum in a usage-based fee, license revenue is recognized at the point in time when the software is made available to the customer.

Maintenance revenue is recognized ratably over the contract period as customers simultaneously consume and receive benefits.

Any usage-based fees not subject to a guaranteed minimum or earned in excess of the minimum amount are recognized when the subsequent usage occurs.

We occasionally sell software arrangements consisting of on-premises perpetual licenses and maintenance.

License revenue is recognized at a point in time when the software is made available to the customer and maintenance revenue is recognized ratably over the contract term.

Our SaaS products provide customers with access to and standard support for our software on a subscription basis, delivered through our own infrastructure or third-party cloud services.

The SaaS transaction contracts typically include a guaranteed minimum fee per period that allows up to a certain level of usage and a consumption-based variable amount in excess of the minimum threshold;

or a consumption-based variable fee not subject to a minimum threshold.

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

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

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

Our professional services include software implementation, consulting, model development and training.

They are sold either standalone, or together with other products or services and generally represent distinct performance obligations.

The transaction price can be a fixed amount or a variable amount based upon the time and materials expended.

Revenue on fixed-price services is recognized using an input method based on labor hours expended which we believe provides a faithful depiction of the transfer of services.

Revenue on services provided on a time and materials basis is recognized by applying the “right-to-invoice” practical expedient as the amount to which we have a right to invoice the customer corresponds directly with the value of our performance to the customer.

Our scoring services include both business-to-business and business-to-consumer offerings.

Our business-to-business scoring services typically include a license that grants consumer reporting agencies the right to use our scoring solutions in exchange for a usage-based royalty.

Revenue is generally recognized when the usage occurs.

Business-to-consumer offerings provide consumers with access to their FICO ® Scores and credit reports, as well as other value-add services.

These are provided as either a one-time or ongoing subscription service renewed monthly or annually, all with a fixed consideration.

We determined the nature of the subscription service is a stand-ready obligation to generate credit reports, provide credit monitoring and other services for our customers, which comprises a series of distinct service periods (e.g., a series of distinct daily, monthly or annual periods of service).

The nature of the subscription service is a stand-ready obligation to generate credit reports, provide credit monitoring, and other services for our customers, which comprises a series of distinct service periods (e.g., a series of distinct daily, monthly or annual periods of service).

Revenue from one-time or monthly subscription services is recognized during the period when service is performed.

Revenue from annual subscription services is recognized ratably over the subscription period.

Professional services include software or SaaS implementation, consulting, model development, training services and premium cloud support.

They are sold either standalone, or together with other products or services and generally represent distinct performance obligations.

The transaction price can be a fixed amount or on a time and materials basis.

Revenue on fixed-price services is recognized using an input method based on labor hours expended which we believe provides a faithful depiction of the transfer of services.

Revenue on services provided on a time and materials basis is recognized applying the “right-to-invoice” practical expedient as the amount to which we have a right to invoice the customer corresponds directly with the value of our performance to the customer.

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

Significant Judgments

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Accounting for our acquisitions requires us to recognize, separately from goodwill, the assets acquired and the liabilities assumed at their acquisition-date fair values.

Goodwill as of the acquisition date is measured as the excess of consideration transferred and the net of the acquisition-date fair values of the assets acquired and the liabilities assumed.

Goodwill as of the acquisition date is measured as the excess of consideration transferred over the net of the acquisition-date fair values of the assets acquired and the liabilities assumed.

While we use our best estimates and assumptions to accurately value assets acquired and liabilities assumed at the acquisition date, our estimates are inherently uncertain and subject to refinement.

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

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

During the fourth quarter of fiscal 2021, we reevaluated our operating segments to better align with how our CODM evaluates performance and allocates resources, which resulted in a change from three operating segments, Applications, Decision Management Software and Scores, to two operating segments, Software and Scores.

As part of this reevaluation, we determined our operating segments continue to represent our reporting units.

When evaluating goodwill for impairment, we may first perform an assessment qualitatively whether it is more likely than not that a reporting unit's carrying amount exceeds its fair value, referred to as a “step zero” approach.

If, based on the review of the qualitative factors, we determine it is not more likely than not that the fair value of a reporting unit is less than its carrying value, we would bypass the two-step impairment test.

Events and circumstances we consider in performing the “step zero” qualitative assessment include macro-economic conditions, market and industry conditions, internal cost factors, share price fluctuations, and the operational stability and the overall financial performance of the reporting units.

Events and circumstances we consider in performing the “step zero” qualitative assessment include macro-economic conditions, market and industry conditions, internal cost factors, share price fluctuations, and the operational stability and overall financial performance of the reporting units.

If we conclude that it is more likely than not that a reporting unit's fair value is less than its carrying amount, we would perform the first step (“step one”) of the two-step impairment test and calculate the estimated fair value of the reporting unit by using discounted cash flow valuation models and by comparing our reporting units to guideline publicly-traded companies.

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We estimate these amounts by evaluating historical trends, current budgets, operating plans, industry data, and other relevant factors.

Using assumptions that are different from those used in our estimates, but in each case reasonable, could produce significantly different results and materially affect the determination of fair value and/or goodwill impairment for each reporting unit.

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

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

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

Alternatively, we may bypass the qualitative assessment described above for any reporting unit in any period and proceed directly to performing step one of the goodwill impairment test.

We performed a step one quantitative impairment test on the Software and Scores reporting units before and immediately following the change in reporting units.

There was a substantial excess of fair value over carrying value for the reporting units and we determined goodwill was not impaired for any of our reporting units before or after the change for fiscal 2021.

For fiscal 2019 and 2020, we performed a step zero qualitative analysis for our annual assessment of goodwill impairment.

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Share-Based Compensation

We measure stock-based compensation cost at the grant date based on the fair value of the award and recognize it as expense, net of estimated forfeitures, over the vesting or service period, as applicable, of the stock award (generally three to four years).

We measure share-based compensation cost at the grant date based on the fair value of the award and recognize it as expense, net of estimated forfeitures, over the vesting or service period, as applicable, of the stock award (generally three to four years).

We use the Black-Scholes valuation model to determine the fair value of our stock options and a Monte Carlo valuation model to determine the fair value of our market share units.

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Recently Adopted Accounting Pronouncements

In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU No.

2016-02, “ Leases (Topic 842) ” and subsequent amendments to the initial guidance:

ASU 2017-13, ASU 2018-10, ASU 2018-11, ASU 2018-20 and ASU 2019-01 (collectively, “Topic 842”).

Topic 842 requires the recognition of operating lease assets and lease liabilities on the balance sheet.

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

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

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

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

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

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

Recent Accounting Pronouncements Not Yet Adopted

In August 2018, the FASB issued ASU No.

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

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

Internal-Use Software.

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.

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

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

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

In June 2016, the FASB issued ASU No.

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Measurement of Credit Losses on Financial Instruments and subsequent amendments to the initial guidance:

ASU 2018-19, ASU 2019-04 and ASU 2019-05 (collectively, “Topic 326”).

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.

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

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

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

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

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What changed 10-K

Item 7. Management’s Discussion and Analysis