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Item 2. Management’s Discussion and Analysis

2022-01-27 compared with 2021-08-03 · 212 added, 344 removed, 251 unchanged (69% of the section changed)

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Examples of forward-looking statements include, but are not limited to:

(i) projections of revenue, income or loss, expenses, earnings or loss per share, the payment or nonpayment of dividends, capital structure and other statements concerning future financial performance;

(i) projections of revenue, income or loss, expenses, earnings or loss per share, the payment or nonpayment of dividends, share repurchases, capital structure and other statements concerning future financial performance;

(ii) statements of our plans and objectives by our management or Board of Directors, including those relating to products or services, research and development, and the sufficiency of capital resources;

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

(iv) statements regarding results of business combinations;

(iv) statements regarding results of business combinations or strategic divestitures;

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

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

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

The performance of our business and our securities may be adversely affected by these factors and by other factors common to other businesses and investments, or to the general economy.

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Readers should carefully review the disclosures and the risk factors described in this and other documents we file from time to time with the SEC, including our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K.

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

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

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

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

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

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

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

Our solutions enable users to make decisions that are more precise, consistent and agile, and that systematically advance business goals.

This helps our clients to reduce the cost of doing business, increase revenues and profitability, reduce losses from risks and fraud, and increase customer loyalty.

A significant portion of our revenues are derived from the sale of products and services within the banking (including consumer credit) industry, and 91% and 86% of our revenues were derived from within this industry during the quarters ended June 30, 2021 and 2020, respectively, and 89% and 86% of our revenues were derived from within this industry during the nine months ended June 30, 2021 and 2020, respectively.

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

Arrangements with transactional or unit-based pricing accounted for 85% and 79% of our revenues during the quarters ended June 30, 2021 and 2020, respectively.

Arrangements with transactional or unit-based pricing accounted for 84% and 77% of our revenues during the nine months ended June 30, 2021 and 2020, respectively.

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

International revenues accounted for 29% and 31% of total consolidated revenues for the quarters ended June 30, 2021 and 2020, respectively, and 29% and 32% of total consolidated revenues for the nine months ended June 30, 2021 and 2020, respectively.

Revenue increased 8% to $338.2 million during the quarter ended June 30, 2021 from $313.7 million for the quarter ended June 30, 2020, and 7% to $982.0 million during the nine months ended June 30, 2021 from $920.2 million during the nine months ended June 30, 2020.

We continue to drive growth in our Scores segment.

Scores revenue increased 31% to $172.2 million during the quarter ended June 30, 2021 from $131.6 million during the quarter ended June 30, 2020, and 29% to $485.6 million during the nine months ended June 30, 2021 from $375.8 million during the nine months ended June 30, 2020.

Scores operating income increased 33% to $146.8 million during the quarter ended June 30, 2021 from $110.2 million during the quarter ended June 30, 2020, and 30% to $416.4 million during the nine months ended June 30, 2021 from $321.1 million during the nine months ended June 30, 2020.

For our Applications and Decision Management Software segments, revenue decreased 9% to $166.0 million during the quarter ended June 30, 2021 from $182.2 million during the quarter ended June 30, 2020, and 9% to $496.4 million during the nine months ended June 30, 2021 from $544.4 million during the nine months ended June 30, 2020.

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

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

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

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

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

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

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

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

In June 2021, we divested the non-platform-based Collections and Recovery (“C&R”) business pursuant to our cloud-enabled, Decision Management Platform-based software strategy, and recognized an operating gain of $92.8 million from the divestiture.

Our operating income increased 135% to $194.4 million during the quarter ended June 30, 2021 from $82.9 million during the quarter ended June 30, 2020, primarily attributable to the gain recognition.

Net income increased 136% to $151.2 million during the quarter ended June 30, 2021 from $64.1 million during the quarter ended June 30, 2020, primarily driven by higher operating income, partially offset by a higher tax provision due to lower excess tax benefits related to stock-based compensation, as well as the gain from the C&R divestiture.

Operating income increased 85% to $390.3 million during the nine months ended June 30, 2021 from $210.5 million during the nine months ended June 30, 2020, and net income increased 73% to $306.4 million from $177.3 million.

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

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

During the quarter and nine months ended June 30, 2021, we repurchased approximately 489,000 shares, including 319,400 shares repurchased under the ASR Agreement, at a total repurchase price of $246.0 million and 1,031,000 shares, including 319,400 shares repurchased under the ASR Agreement, at a total repurchase price of $501.2 million, respectively.

As of June 30, 2021, we had $225.3 million remaining under our current stock repurchase program, which includes a $40.0 million prepayment under the ASR Agreement.

COVID-19 Update

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

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

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

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

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

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 13 to the accompanying condensed consolidated financial statements, we believe the bookings amount is still a meaningful measure of our business as it includes estimated revenues omitted from Note 13, 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 take into consideration contract terms, knowledge of the marketplace and experience with our customers, among other factors.

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

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

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

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

Transactional and Maintenance Bookings

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

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

We were founded in 1956 on the premise that data, used intelligently, can improve business decisions.

Today, FICO’s software and the widely used FICO ® Score operationalize analytics, enabling thousands of businesses in nearly 120 countries to uncover new opportunities, make timely decisions that matter, and execute them at scale.

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

We also serve consumers through online services that enable people to access and understand their FICO Scores — the standard measure in the U.S.

of consumer credit risk — empowering them to increase financial literacy and manage their financial health.

Our business consists of two operating segments:

Scores and Software.

Our Scores segment includes our business-to-business (“B2B”) scoring solutions and services which give our clients access to predictive credit and other scores that can be easily integrated into their transaction workflows and decision-making processes.

This segment also includes our business-to-consumer (“B2C”) scoring solutions, including our myFICO.com subscription offerings.

Our Software segment includes pre-configured analytic and decision management solutions designed for a specific type of business need or process — such as account origination, customer management, customer engagement, fraud detection, financial crimes compliance, and marketing — as well as associated professional services.

This segment also includes FICO ® Platform, a modular software offering designed to support advanced analytic and decision use cases, as well as stand-alone analytic and decisioning software that can be configured by our customers to address a wide variety of business use cases.

Our offerings are available to our customers as software-as-a-service (“SaaS”) or as on-premises software.

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 2022, 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 employees 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 II, Item 1A of this Report.

Highlights from the quarter ended December 31, 2021

• Total revenue was $322.4 million during the quarter ended December 31, 2021, a 3% increase from the quarter ended December 31, 2020.

• Total revenue for our Scores segment was $169.5 million during the quarter ended December 31, 2021, a 17% increase from the quarter ended December 31, 2020.

• Annual Recurring Revenue for our Software segment as of December 31, 2021 was $546.6 million, a 10% increase from December 31, 2020, excluding divestitures.

• Dollar-Based Net Retention Rate for our Software segment during the quarter ended December 31, 2021 was 109%, excluding divestitures.

• Cash and cash equivalents was $162.2 million as of December 31, 2021, compared with $195.4 million as of September 30, 2021.

• Operating income was $115.6 million during the quarter ended December 31, 2021, a 22% increase from the quarter ended December 31, 2020.

• Net income was $85.0 million during the quarter ended December 31, 2021, a 2% decrease from the quarter ended December 31, 2020.

• EPS was $3.09 during the quarter ended December 31, 2021, a 7% increase from the quarter ended December 31, 2020.

• Cash flows from operations was $124.9 during the quarter ended December 31, 2021, compared with $77.9 million generated during the quarter ended December 31, 2020.

• Total debt balance was $1.65 billion as of December 31, 2021, compared with $1.27 billion as of September 30, 2021.

• Total amount of share repurchases was $493.6 million during the quarter ended December 31, 2021, compared with $50.0 million during the quarter ended December 31, 2020.

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 and other GAAP measures.

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 term or perpetual basis when bookings generally equal the fixed amount (including guaranteed minimums) stated in the contract.

Bookings Trend Analysis

Bookings Bookings

Million Weighted-

(In millions) (Months)

Quarter Ended June 30, 2021 $ 75.5 12 % 10 30

Quarter Ended June 30, 2020 $ 106.2 15 % 16 37

Nine Months Ended June 30, 2021 $ 227.6 21 % 34 NM (a)

Nine Months Ended June 30, 2020 $ 302.4 29 % 56 NM (a)

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

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

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

Transactional and maintenance bookings were 53% and 49% of total bookings for the quarters ended June 30, 2021 and 2020, respectively.

Professional services bookings were 28% and 39% of total bookings for the quarters ended June 30, 2021 and 2020, respectively.

License bookings were 19% of total bookings for each of the quarters ended June 30, 2021 and 2020.

Transactional and maintenance bookings were 59% and 44% of total bookings for the nine months ended June 30, 2021 and 2020, respectively.

Professional services bookings were 26% and 38% of total bookings for the nine months ended June 30, 2021 and 2020, respectively.

License bookings were 15% and 18% of total bookings for the nine months ended June 30, 2021 and 2020, respectively.

RESULTS OF OPERATIONS

The following tables set forth certain summary information on a segment basis related to our revenues for the quarters and nine-month periods ended June 30, 2021 and 2020:

Quarter Ended June 30, Percentage of Revenues Period-to-Period Change Period-to-Period

Percentage Change

Segment 2021 2020 2021 2020

(In thousands) (In thousands)

Applications $ 133,213 $ 141,460 39 % 45 % $ (8,247) (6) %

Scores 172,202 131,550 51 % 42 % 40,652 31 %

Decision Management Software 32,769 40,721 10 % 13 % (7,952) (20) %

We disclose estimated revenue expected to be recognized in the future related to remaining performance obligations in Note 8 to the accompanying condensed 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 8, 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 December 31,

(In millions)

Total on-premises and SaaS software * $ 16.6 $ 12.4

(*) 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 Collections and Recovery (“C&R”) business.

The amount for the quarter ended December 31, 2020 excluded these divested product lines and businesses.

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:

March 31, 2020 June 30,

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

2021 September 30, 2021 December 31, 2021

(In millions)

Platform (**)

$ 41.1 $ 43.8 $ 47.7 $ 55.1 $ 60.2 $ 67.7 $ 75.2 $ 92.2

Non-platform 450.3 438.5 443.6 439.9 437.1 445.9 448.8 454.4

Total $ 491.4 $ 482.3 $ 491.3 $ 495.0 $ 497.3 $ 513.6 $ 524.0 $ 546.6

Nine Months Ended June 30, Percentage of Revenues Period-to-Period Change Period-to-Period

Platform 8 % 9 % 10 % 11 % 12 % 13 % 14 % 17 %

Non-platform 92 % 91 % 90 % 89 % 88 % 87 % 86 % 83 %

Total 100 % 100 % 100 % 100 % 100 % 100 % 100 % 100 %

Platform 48 % 44 % 45 % 38 % 47 % 54 % 58 % 67 %

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

Total on-premises and SaaS software 7 % — % 1 % 2 % 1 % 7 % 7 % 10 %

The amounts and percentages above excluded 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 new 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

March 31, 2020 June 30,

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

2021 September 30, 2021 December 31, 2021

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

Non-platform 103 % 95 % 96 % 97 % 96 % 100 % 100 % 102 %

Total on-premises and SaaS software 105 % 98 % 99 % 100 % 100 % 105 % 106 % 109 %

The percentages above excluded these divested product lines and businesses for all periods presented.

RESULTS OF OPERATIONS

We are organized into the following two reportable segments:

Scores and Software.

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 are set forth in Note 8 and Note 12 to the accompanying condensed consolidated financial statements.

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

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

Percentage Change

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(In thousands) (In thousands)

Applications $ 398,088 $ 433,917 41 % 47 % $ (35,829) (8) %

Scores $ 169,487 $ 144,651 53 % 46 % $ 24,836 17 %

Decision Management Software 98,299 110,453 10 % 12 % (12,154) (11) %

Total $ 981,959 $ 920,206 100 % 100 % 61,753 7 %

Quarter Ended June 30, 2021 Compared to Quarter Ended June 30, 2020

Quarter Ended June 30, Period-to-Period Change Period-to-Period

Percentage Change

(In thousands) (In thousands)

Transactional and maintenance $ 99,822 $ 98,476 $ 1,346 1 %

Professional services 26,381 32,364 (5,983) (18) %

License 7,010 10,620 (3,610) (34) %

Total $ 133,213 $ 141,460 (8,247) (6) %

Applications segment revenues decreased $8.2 million due to a $6.0 million decrease in services revenue and a $3.6 million decrease in license revenue, partially offset by a $1.3 million increase in transactional and maintenance revenue.

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

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

Quarter Ended June 30, Period-to-Period Change Period-to-Period

Percentage Change

(In thousands) (In thousands)

Transactional and maintenance $ 170,415 $ 130,268 $ 40,147 31 %

Professional services 166 58 108 186 %

License 1,621 1,224 397 32 %

Total $ 172,202 $ 131,550 40,652 31 %

Scores segment revenues increased $40.7 million due to an increase of $22.0 million in our business-to-business scores revenue and $18.7 million in our business-to-consumer services revenue.

The increase in business-to-business scores revenue was primarily attributable to a higher unit price in the insurance and auto reseller markets, as well as higher origination volumes during the quarter ended June 30, 2021.

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

Revenues generated from our agreements with Experian, TransUnion, and Equifax accounted for 17%, 12% and 10%, respectively, of our total revenues for the quarter ended June 30, 2021.

Revenues generated from our agreements with Experian, TransUnion, and Equifax accounted for 15%, 11% and 9%, respectively, of our total revenues for the quarter ended June 30, 2020.

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

Decision Management Software

Quarter Ended June 30, Period-to-Period Change Period-to-Period

Percentage Change

(In thousands) (In thousands)

Transactional and maintenance $ 17,841 $ 18,085 $ (244) (1) %

Professional services 9,371 11,211 (1,840) (16) %

License 5,557 11,425 (5,868) (51) %

Total $ 32,769 $ 40,721 (7,952) (20) %

Decision Management Software segment revenues decreased $8.0 million primarily due to a $5.9 million decrease in license revenue and a $1.8 million decrease in services revenue.

The decrease in license revenue was primarily attributable to a decrease in the number and size of term license deals signed or renewed during the quarter ended June 30, 2021.

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

Nine Months Ended June 30, 2021 Compared to Nine Months Ended June 30, 2020

Nine Months Ended June 30, Period-to-Period Change Period-to-Period

Percentage Change

(In thousands) (In thousands)

Transactional and maintenance $ 294,240 $ 295,102 $ (862) — %

Professional services 84,613 101,521 (16,908) (17) %

License 19,235 37,294 (18,059) (48) %

Total $ 398,088 $ 433,917 (35,829) (8) %

Applications segment revenues decreased $35.8 million primarily due to an $18.1 million decrease in license revenue and a $16.9 million decrease in services revenue.

The decrease in license revenue was primarily attributable to the shift in the timing of revenue recognition on our term license subscription sales as a result of changing our practice of selling term licenses with separate license and maintenance components to a single software subscription contract with license and maintenance bundled, as well as a decrease in the number and size of term license deals signed or renewed during the nine months ended June 30, 2021, mainly in our fraud solutions.

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

Nine Months Ended June 30, Period-to-Period Change Period-to-Period

Percentage Change

(In thousands) (In thousands)

Transactional and maintenance $ 476,217 $ 365,324 $ 110,893 30 %

Professional services 986 1,141 (155) (14) %

License 8,369 9,371 (1,002) (11) %

Software 152,874 167,763 47 % 54 % (14,889) (9) %

Total $ 322,361 $ 312,414 100 % 100 % 9,947 3 %

Scores segment revenues increased $109.7 million due to an increase of $62.5 million in our business-to-business scores revenue and $47.2 million in our business-to-consumer services revenue.

The increase in business-to-business scores revenue was primarily attributable to a higher unit price in the auto, unsecured originations and insurance markets, as well as higher origination volumes.

Revenues generated from our agreements with Experian, TransUnion, and Equifax accounted for 16%, 12% and 10%, respectively, of our total revenues for the nine months ended June 30, 2021.

Revenues generated from our agreements with Experian, TransUnion, and Equifax accounted for 14%, 10% and 8%, respectively, of our total revenues for the nine months ended June 30, 2020.

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

Decision Management Software

Nine Months Ended June 30, Period-to-Period Change Period-to-Period

Scores segment revenues increased $24.8 million due to an increase of $12.8 million in our business-to-business scores revenue and $12.0 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 aggregate volumes during the quarter ended December 31, 2021.

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

Revenues collectively generated by agreements with the three major consumer reporting agencies, TransUnion, Equifax, and Experian accounted for 38% and 34% of our total revenues in the quarters ended December 31, 2021 and 2020, respectively, with two consumer reporting agencies each contributing more than 10% of our total revenues in each of the quarters ended December 31, 2021 and 2020.

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

Percentage Change

(In thousands) (In thousands)

Transactional and maintenance $ 50,690 $ 47,479 $ 3,211 7 %

On-premises and SaaS software

$ 126,338 $ 126,455 $ (117) — %

Professional services 26,536 41,308 (14,772) (36) %

License 18,071 30,073 (12,002) (40) %

Total $ 152,874 $ 167,763 (14,889) (9) %

Decision Management Software segment revenues decreased $12.2 million due to a $12.0 million decrease in license revenue and a $3.4 million decrease in services revenue, partially offset by a $3.2 million increase in transactional and maintenance revenue.

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

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

Software segment revenues decreased $14.9 million due to a $14.8 million decrease in services revenue and a $0.1 million decrease in our on-premises and SaaS software revenue.

The decrease in services revenue was primarily attributable to our strategic shift to emphasize software over services, as well as the divestiture of our C&R business in June 2021.

The decrease in our on-premises and SaaS software revenue was primarily attributable to the C&R business divestiture, partially offset by an increase in our platform software revenue.

In total, $16.3 million of the quarter-over-prior year quarter decrease — $8.3 million from on-premises and SaaS software and $8.0 million from services — in our Software segment revenue was attributable to the divestiture of our C&R business.

Operating Expenses and Other Income / Expenses

The following tables set forth certain summary information related to our condensed consolidated statements of income and comprehensive income for the quarters and nine-month periods ended June 30, 2021 and 2020:

Quarter Ended June 30, Percentage of Revenues Period-to-Period Change Period-to-

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

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

Percentage Change

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Number of employees at quarter end 3,516 3,890 (374) (10) %

Nine Months Ended June 30, Percentage of Revenues Period-to-Period Change Period-to-

Percentage Change

2021 2020 2021 2020

(In thousands) (In thousands)

Revenues $ 981,959 $ 920,206 100 % 100 % $ 61,753 7 %

Operating expenses:

Cost of Revenues

Research and development 130,089 119,793 13 % 13 % 10,296 9 %

Selling, general and administrative 298,912 315,318 31 % 34 % (16,406) (5) %

Amortization of intangible assets 2,692 4,046 — % 1 % (1,354) (33) %

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

Gains on product line asset sales and business divestiture (100,139) — (10) % — % (100,139) — %

Total operating expenses 591,655 709,727 60 % 77 % (118,072) (17) %

Operating income 390,304 210,479 40 % 23 % 179,825 85 %

Interest expense, net (29,602) (32,245) (3) % (3) % 2,643 (8) %

Other income, net 6,974 2,333 1 % — % 4,641 199 %

Income before income taxes 367,676 180,567 37 % 20 % 187,109 104 %

Income tax provision 61,312 3,282 6 % 1 % 58,030 1,768 %

Net income $ 306,364 $ 177,285 31 % 19 % 129,079 73 %

Cost of Revenues

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

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and outside services.

The quarter-over-prior year quarter decrease in cost of revenues of $6.3 million was primarily attributable to a $4.2 million decrease in personnel and labor costs and a $3.2 million decrease in allocated facilities and infrastructure costs, 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.

The increase was partially offset by a $1.4 million increase in direct materials cost as a result of increased third-party data costs related to increased Scores revenue.

Cost of revenues as a percentage of revenues decreased to 24% during the quarter ended June 30, 2021 from 29% during the quarter ended June 30, 2020, primarily due to increased sales of our higher-margin Scores products.

The year-to-date period over period decrease in cost of revenues of $7.4 million was primarily attributable to $6.4 million decrease in allocated facilities and infrastructure costs and a $3.7 million decrease in travel costs, partially offset by a $4.3 million increase in direct materials cost.

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

The decrease in travel costs was primarily attributable to a decrease in travel activity due to COVID-19.

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

Cost of revenues as a percentage of revenues decreased to 26% during the nine months ended June 30, 2021 from 29% during the nine months ended June 30, 2020, primarily due to increased sales of our higher-margin Scores products.

The quarter-over-prior year quarter decrease in cost of revenues of $20.3 million was primarily attributable to a $16.6 million decrease in personnel and labor costs and a $4.6 million decrease in allocated facilities and infrastructure costs.

Both were largely driven by a decrease in our headcount as a result of the divestiture of our C&R business in June 2021, as well as reduced resource requirements associated with decreased services revenue.

Cost of revenues as a percentage of revenues decreased to 21% during the quarter ended December 31, 2021 from 29% during the quarter ended December 31, 2020, primarily due to increased sales of our higher-margin Scores products and decreased sales of lower-margin professional services.

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 quarter-over-prior year quarter increase in research and development expenses of $4.4 million was primarily attributable to an increase in labor and personnel costs as a result of increased headcount.

Research and development expenses as a percentage of revenues increased to 14% during the quarter ended June 30, 2021 from 13% during the quarter ended June 30, 2020.

The year-to-date period over period increase in research and development expenses of $10.3 million was primarily attributable to an increase in labor and personnel costs as a result of increased headcount.

Research and development expenses as a percentage of revenues was 13% during each of the nine months ended June 30, 2021 and June 30, 2020.

The quarter-over-prior year quarter decrease in research and development expenses of $1.7 million was primarily attributable to a decrease in third-party cloud computing cost.

Research and development expenses as a percentage of revenues decreased to 12% during the quarter ended December 31, 2021 from 13% during the quarter ended December 31, 2020.

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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business development expenses.

and the cost of operating computer systems.

The quarter-over-prior year quarter increase in selling, general and administrative expenses of $7.9 million was primarily attributable to an increase in personnel and labor costs, primarily driven by an increase in share-based compensation and incentive costs, partially offset by a decrease in non-capitalizable commission cost.

Selling, general and administrative expenses as a percentage of revenues was 32% during each of the quarters ended June 30, 2021 and June 30, 2020.

The year-to-date period over period decrease in selling, general and administrative expenses of $16.4 million was primarily attributable to a $7.6 million decrease in travel costs, a $5.5 million decrease in allocated facilities and infrastructure costs, as well as a $4.1 million decrease in marketing costs.

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

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.

The decrease in marketing costs was primarily driven by a company-wide marketing event held during the first quarter of our fiscal 2020.

Selling, general and administrative expenses as a percentage of revenues decreased to 31% during the nine months ended June 30, 2021 from 34% during the nine months ended June 30, 2020.

The quarter-over-prior year quarter increase in selling, general and administrative expenses of $4.1 million was primarily attributable to a $1.3 million increase in allocated facilities cost, a $1.1 million increase in personnel and labor costs, and a $0.5 million increase in travel cost.

Selling, general and administrative expenses as a percentage of revenues was 31% during the quarter ended December 31, 2021, materially consistent with that incurred during the quarter ended December 31, 2020.

Amortization of Intangible Assets

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

Amortization expense was $0.8 million during the quarter ended June 30, 2021 compared to $1.0 million during the quarter ended June 30, 2020.

Amortization expense was $2.7 million during the nine months ended June 30, 2021 compared to $4.0 million during the nine months ended June 30, 2020.

The decrease was primarily attributable to certain assets associated with our Tonbeller acquisition becoming fully amortized in January 2020.

Restructuring and Impairment Charges

There were no restructuring expenses during the quarter and nine months ended June 30, 2021.

There were no restructuring expenses during the quarter ended June 30, 2020.

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

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

Amortization expense was $0.5 million during the quarter ended December 31, 2021 compared to $0.9 million during the quarter ended December 31, 2020.

Gains on Product Line Asset Sales and Business Divestiture

The $92.8 million g ain on product line asset sales and business divestiture during the quarter ended June 30, 2021 was attributable to the sale of the C&R business in June 2021.

The $100.1 million gain during the nine months ended June 30, 2021 also included a $7.3 million gain attributable to the sale of all assets related to our cyber risk score operations in October 2020, and the sale of certain assets related to our Applications and Decision Management Software operations to an affiliated joint venture in China in December 2020.

The $7.3 million g ain on product line asset sales and business divestiture during the quarter ended December 31, 2020 was attributable to the sale of all assets related to our cyber risk score operations in October 2020 and the sale of certain assets related to our Software operations to an affiliated joint venture in China in December 2020.

Interest Expense, Net

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

Interest expense includes interest on the senior notes issued in December 2021, December 2019 and May 2018, as well as interest and credit facility fees on the revolving line of credit and term loan.

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

The quarter-over-prior year quarter decrease in interest expense of $1.2 million was primarily attributable to a lower average outstanding debt balance during the quarter ended June 30, 2021.

The year-to-date period over period decrease in interest expense of $2.6 million was primarily attributable to a lower average outstanding debt balance during the nine months ended June 30, 2021.

The quarter-over-prior year quarter increase in interest expense of $2.6 million was primarily attributable to a higher average outstanding debt balance during the quarter ended December 31, 2021.

Other Income, Net

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The quarter-over-prior year quarter decrease in other income, net of $1.5 million was primarily attributable to a decrease in net unrealized gains on our supplemental retirement and savings plan.

The year-to-date period over period increase in other income, net of $4.6 million was primarily attributable to an increase in net unrealized gains on our supplemental retirement and savings plan during the nine months ended June 30, 2021.

Income Tax Provision

The effective income tax rates were 19.5% and 15.9% during the quarters ended June 30, 2021 and 2020, respectively, and 16.7% and 1.8% during the nine months ended June 30, 2021 and 2020, respectively.

The effective income tax rate was 18.9% and 1.7% during the quarters ended December 31, 2021 and 2020, respectively.

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

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

The effective tax rates for the nine months ended June 30, 2021 and 2020 were both impacted favorably by the recording of excess tax benefits relating to stock awards.

In addition, the effective tax rate for the nine months ended June 30, 2021 was increased by the tax impact of the gain on the sale of C&R business.

Operating Income

The following tables set forth certain summary information on a segment basis related to our operating income (loss) for the quarters and nine-month periods ended June 30, 2021 and 2020:

Quarter Ended June 30, Period-to-Period Change Period-to-Period

Percentage Change

Segment 2021 2020

(In thousands) (In thousands)

Applications $ 35,429 $ 30,399 $ 5,030 17 %

Scores 146,784 110,217 36,567 33 %

Decision Management Software (15,243) (3,118) (12,125) 389 %

Corporate expenses (33,820) (31,315) (2,505) 8 %

Total segment operating income 133,150 106,183 26,967 25 %

Unallocated share-based compensation (30,761) (22,264) (8,497) 38 %

Unallocated amortization expense (810) (1,048) 238 (23) %

Unallocated gains on product line asset sales and business divestiture 92,805 — 92,805 — %

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

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

The decrease in stock price for awards that vested in December 2021 has resulted in a decreased net excess tax benefit for the quarter ended December 31, 2021.

Operating Income

Nine Months Ended June 30, Period-to-Period Change Period-to-Period

The following tables set forth certain summary information on a segment basis related to our operating income for the quarters ended December 31, 2021 and 2020:

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

Percentage Change

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(In thousands) (In thousands)

Applications $ 98,303 $ 95,390 $ 2,913 3 %

Scores $ 147,503 $ 123,025 $ 24,478 20 %

Decision Management Software (40,233) (31,385) (8,848) 28 %

Corporate expenses (97,465) (99,310) 1,845 (2) %

Software 34,293 20,684 13,609 66 %

Unallocated corporate expenses (35,788) (30,253) (5,535) 18 %

Total segment operating income 146,008 113,456 32,552 29 %

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Unallocated amortization expense (544) (937) 393 (42) %

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

Unallocated gains on product line asset sales and business divestiture — 7,334 (7,334) (100) %

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Quarter Ended

June 30, Percentage of

Revenues Nine Months Ended

June 30, Percentage of

December 31, Percentage of

2021 2020 2021 2020

(In thousands) (In thousands)

(In thousands)

Segment revenues $ 169,487 $ 144,651 100 % 100 %

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Quarter Ended

June 30, Percentage of

Revenues Nine Months Ended

June 30, Percentage of

December 31, Percentage of

2021 2020 2021 2020

(In thousands) (In thousands)

(In thousands)

Segment revenues $ 152,874 $ 167,763 100 % 100 %

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Segment operating income $ 34,293 $ 20,684 22 % 12 %

Decision Management Software

Quarter Ended

June 30, Percentage of

Revenues Nine Months Ended

June 30, Percentage of

2021 2020 2021 2020 2021 2020 2021 2020

(In thousands) (In thousands)

Segment revenues $ 32,769 $ 40,721 100 % 100 % $ 98,299 $ 110,453 100 % 100 %

Segment operating expense (48,012) (43,839) (147) % (108) % (138,532) (141,838) (141) % (128) %

Segment operating loss $ (15,243) $ (3,118) (47) % (8) % $ (40,233) $ (31,385) (41) % (28) %

The quarter-over-prior year quarter $111.5 million increase in operating income was primarily attributable to an $92.8 million gain on product line asset sales and business divestiture during the quarter ended June 30, 2021, a $24.5 million increase in segment revenues and a $5.0 million decrease in segment operating expenses, partially offset by an $8.5 million increase in share-based compensation cost and a $2.5 million increase in corporate expenses.

At the segment level, the quarter-over-prior year quarter $27.0 million increase in segment operating income was the result of a $36.6 million increase in our Scores segment operating income and a $5.0 million increase in our Applications segment operating income, partially offset by a $12.1 million increase in our Decision Management Software segment operating loss and a $2.5 million increase in corporate expenses.

The quarter-over-prior year quarter $5.0 million increase in Applications segment operating income was due to a $13.3 million decrease in segment operating expenses, partially offset by a $8.3 million decrease in segment revenue.

Segment operating income as a percentage of segment revenue for Applications increased to 27% from 21%, primarily attributable to a decrease in travel activity due to COVID-19, as well as our strategic cost initiative implemented in September 2020, in which we reduced our workforce, consolidated office space and abandoned certain property and equipment.

The quarter-over-prior year quarter $20.9 million increase in operating income was primarily attributable to a $28.2 million decrease in segment operating expenses and a $9.9 million increase in segment revenues, partially offset by a $7.3 million gain on product line asset sales during the quarter ended December 31, 2020, a $5.5 million increase in corporate expenses, and a $4.7 million increase in share-based compensation cost.

At the segment level, the quarter-over-prior year quarter $32.6 million increase in segment operating income was the result of a $24.5 million increase in our Scores segment operating income and a $13.6 million increase in our Software segment operating income, partially offset by a $5.5 million increase in corporate expenses.

The quarter-over-prior year quarter $24.5 million increase in Scores segment operating income was due to a $24.8 million increase in segment revenue, partially offset by a $0.3 million increase in segment operating expenses.

Segment operating margin for Scores during the quarter ended June 30, 2021 was 85%, consistent with the quarter ended June 30, 2020.

The quarter-over-prior year quarter $12.1 million increase in Decision Management Software segment operating loss was due to a $7.9 million decrease in segment revenue and a $4.2 million increase in segment operating expenses.

Segment operating margin for Decision Management Software decreased to negative 47% from negative 8%, mainly due to a decrease in sales of our higher-margin software products.

The year-to-date period over period increase of $179.8 million in operating income was primarily attributable to a $100.1 million gain on product line asset sales and business divestiture during the nine months ended June 30, 2021, a $61.8 million increase in segment revenues, a $27.5 million decrease in segment operating expenses and a $3.1 million decrease in restructuring and impairment charges, partially offset by a $15.9 million increase in share-based compensation cost.

At the segment level, the year-to-date period over period increase of $91.1 million in segment operating income was the result of a $95.2 million increase in our Scores segment operating income, a $2.9 million increase in our Applications segment operating income and a $1.8 million decrease in corporate expenses, partially offset by an $8.8 million increase in our Decision Management Software segment operating loss.

The year-to-date period over period $2.9 million increase in Applications segment operating income was due to a $38.7 million decrease in segment operating expenses, partially offset by a $35.8 million decrease in segment revenue.

Segment operating income as a percentage of segment revenue for Applications increased to 25% from 22%, primarily attributable to a decrease in travel activity due to COVID-19, as well as our strategic cost initiative implemented in September 2020 in which we reduced our workforce, consolidated office space and abandoned certain property and equipment.

The year-to-date period over period $95.2 million increase in Scores segment operating income was attributable to a $109.7 million increase in segment revenue, partially offset by a $14.5 million increase in segment operating expenses.

Segment operating margin for Scores during the nine months ended June 30, 2021 was 86%, consistent with the nine months ended June 30, 2020.

The year-to-date period over period $8.8 million increase in Decision Management Software segment operating loss was attributable to a $12.1 million decrease in segment revenue, partially offset by a $3.3 million decrease in segment operating expenses.

Segment operating margin for Decision Management Software decreased to negative 41% from negative 28%, mainly due to a decrease in sales of our higher-margin software products.

Segment operating income as a percentage of segment revenue for Scores increased to 87% from 85%.

The quarter-over-prior year quarter $13.6 million increase in Software segment operating income was due to a $28.5 million decrease in segment operating expenses, partially offset by a $14.9 million decrease in segment revenue.

Segment operating income as a percentage of segment revenue for Software increased to 22% from 12%, primarily attributable to the divestiture of our lower-margin C&R business, and a reduction in lower-margin services revenue.

CAPITAL RESOURCES AND LIQUIDITY

As of June 30, 2021, we had $237.6 million in cash and cash equivalents, which included $186.4 million held by our foreign subsidiaries.

As of December 31, 2021, we had $162.2 million in cash and cash equivalents, which included $95.5 million held by our foreign subsidiaries.

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

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

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

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 as well as the $15.0 million principal payments on our term loan over the next twelve months.

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

Our undistributed earnings outside the U.S.

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Summary of Cash Flows

Nine Months Ended June 30, Period-to-Period Change

Quarter Ended December 31, Period-to-Period Change

(In thousands)

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Effect of exchange rate changes on cash (1,377) 5,267 (6,644)

Increase in cash and cash equivalents $ 80,218 $ 19,247 60,971

Decrease in cash and cash equivalents $ (33,197) $ (12,732) (20,465)

Cash Flows from Operating Activities

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

Net cash provided by operating activities increased to $332.1 million during the nine months ended June 30, 2021 from $228.7 million during the nine months ended June 30, 2020.

The $103.3 million increase was attributable to a $129.1 million increase in net income and a $80.6 million increase that resulted from timing of receipts and payments in our ordinary course of business, partially offset by a $106.3 million decrease in non-cash items, including a $100.1 million gain on product line asset sales and business divestiture.

Net cash provided by operating activities increased to $124.9 million during the quarter ended December 31, 2021 from $77.9 million during the quarter ended December 31, 2020.

The $47.0 million increase was primarily attributable to a $31.4 million increase that resulted from timing of receipts and payments in our ordinary course of business and an $18.9 million increase in non-cash items.

Cash Flows from Investing Activities

Net cash provided by investing activities was $137.6 million for the nine months ended June 30, 2021 as compared to net cash used of $23.3 million for the nine months ended June 30, 2020.

The $160.9 million change was primarily attributable to $146.4 million in cash proceeds from the product line asset sales and business divestiture during the nine months ended June 30, 2021 and a $15.3 million decrease in purchases of property and equipment.

Net cash used in investing activities was $1.3 million for the quarter ended December 31, 2021 as compared to net cash provided of $3.9 million for the quarter ended December 31, 2020.

The $5.2 million change was primarily attributable to a $6.0 million decrease in cash proceeds from the product line asset sales and business divestiture.

Cash Flows from Financing Activities

Net cash used in financing activities increased to $394.6 million for the nine months ended June 30, 2021 from $183.5 million for the nine months ended June 30, 2020.

The $211.1 million increase was primarily attributable to a $350.0 million decrease in proceeds from issuance of senior notes and a $331.2 million increase in repurchases of common stock, partially offset by a $236.0 million increase in proceeds from our revolving line of credit and a $227.0 million decrease in payments on our revolving line of credit.

Net cash used in financing activities increased to $155.4 million for the quarter ended December 31, 2021 from $99.8 million for the quarter ended December 31, 2020.

The $55.6 million increase was primarily attributable to a $432.7 million increase in repurchases of common stock and a $204.0 million increase in payments, net of proceeds, on our revolving line of credit, partially offset by a $550.0 million increase in proceeds from the issuance of senior notes and a $38.7 million decrease in taxes paid related to net share settlement of equity awards.

Repurchases of Common Stock

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

In August 2021, our Board of Directors approved a stock repurchase program following the completion of our previous program.

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

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

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

As part of the broader share repurchase program, we entered into the ASR Agreement with Wells Fargo on June 17, 2021 to repurchase $200.0 million of our common stock.

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

The final number of shares to be repurchased and the average price paid per share will be determined upon the expected settlement of the agreement during the fourth quarter of fiscal 2021.

Pursuant to the July 2020 and March 2021 programs, we repurchased approximately 489,000 shares of our common stock, including 319,400 shares repurchased under the ASR Agreement, at a total repurchase price of $246.0 million and 1,031,000 shares of our common stock, including 319,400 shares repurchased under the ASR Agreement, at a total repurchase price of $501.2 million during the quarter and nine months ended June 30, 2021, respectively.

As of June 30, 2021, we had $225.3 million remaining under the March 2021 program, which includes a $40.0 million prepayment under the ASR Agreement.

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

Pursuant to the August 2021 and November 2021 programs, we repurchased approximately 1,243,619 shares of our common stock at a total repurchase price of $493.6 million during the quarter ended December 31, 2021.

As of December 31, 2021, we had $167.5 million remaining under the November 2021 program.

Subsequent to December 31, 2021, we repurchased approximately 375 thousand shares of our common stock at a total repurchase price of $164.1 million under the November 2021 program.

As a result, in January 2022, our Board of Directors approved a new stock repurchase program, which 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.

Revolving Line of Credit

We have a $400 million unsecured revolving line of credit with a syndicate of banks that expires on May 8, 2023.

We have a $600 million unsecured revolving line of credit with a syndicate of banks that expires on August 19, 2026.

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.

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In addition, we must pay credit facility fees.

The credit facility contains certain restrictive covenants including:

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

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 interest coverage ratio of 3.00.

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

As of June 30, 2021, we had $316.0 million in borrowings outstanding at a weighted-average interest rate of 1.216% and we were in compliance with all financial covenants under this credit facility, and do not believe we are at material risk of not meeting these covenants due to COVID-19.

On October 20, 2021, we amended our credit agreement to provide for the issuance of a $300 million term loan, increasing the total capacity of the agreement to $900 million.

The term loan is subject to the same pricing and covenants as the revolving line of credit and matures at the expiration of the facility on August 19, 2026.

The term loan requires principal payments in consecutive quarterly installments of $3.75 million on the last business day of each quarter, commencing on March 31, 2022.

As of December 31, 2021, we had $50.0 million in borrowings outstanding under the revolving credit facility at a weighted-average interest rate of 1.352%, and $300.0 million in outstanding balance of the term loan at an interest rate of 1.354%, of which $285.0 million was classified as a long-term liability and recorded in long-term debt within the accompanying condensed consolidated balance sheets.

We were in compliance with all financial covenants under this credit facility as of December 31, 2021.

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

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

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

On December 6, 2019, we issued $350 million of senior notes in a private offering to qualified institutional investors (the “2019 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.

On December 17, 2021, we issued $550 million of additional senior notes of the same class as the 2019 Senior Notes in a private offering to qualified institutional investors (the “2021 Senior Notes,” and collectively with the 2018 Senior Notes and the 2019 Senior Notes, the “Senior Notes”).

The 2021 Senior Notes require interest payments semi-annually at a rate of 4.00% per annum and will mature on June 15, 2028, the same date as the 2019 Senior Notes.

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

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

As of December 31, 2021, the carrying value of the Senior Notes was $1.30 billion and we were in compliance with all financial covenants under these obligations, and do not believe we are at material risk of not meeting these covenants due to COVID-19.

Off-Balance Sheet Arrangements

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

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

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

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

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

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 fee 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.

Professional services 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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A reduction in our estimate of remaining useful lives, if any, could result in increased annual amortization expense in future periods.

We did not recognize any impairment charges on intangible assets that have finite useful lives or other long-lived assets in fiscal 2021, 2020, and 2019.

As discussed above, while we believe that the assumptions and estimates utilized were appropriate based on the information available to management, different assumptions, judgments and estimates could materially affect our impairment assessments for our goodwill, acquired intangibles with finite lives and other long-lived assets.

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

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.

Our valuation models and generally accepted valuation techniques require us to make assumptions and to apply judgment to determine the fair value of our awards.

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New Accounting Pronouncements

Recently Adopted Accounting Pronouncements

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

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

Internal-Use Software (“ASU 2018-15”).

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

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

In June 2016, the FASB issued ASU No.

2016-13, Financial Instruments—Credit Losses (Topic 326):

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

ASU 2018-19, ASU 2019-04, ASU 2019-05 and ASU 2019-11 (collectively, “Topic 326”).

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

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

Recent Accounting Pronouncements Not Yet Adopted

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

In October 2021, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No.

2021-08, “ Business Combinations (Topic 805):

Accounting for Contract Assets and Contract Liabilities from Contracts with Customers ” (“ASU 2021-08”).

ASU 2021-08 requires an acquirer in a business combination to recognize and measure contract assets and contract liabilities from acquired contracts using the revenue recognition guidance under Accounting Standards Codification Topic 606 in order to align the recognition of a contract liability with the definition of a performance obligation.

The standard is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years, which means that it will be effective for our fiscal year beginning October 1, 2023.

Early adoption is permitted.

We do not believe that adoption of ASU 2021-08 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.

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What changed 10-Q

Item 2. Management’s Discussion and Analysis