What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-04-27 compared with 2022-01-27 · 159 added, 93 removed, 370 unchanged (41% of the section changed)

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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.

Due to the COVID-19 pandemic, we continue to conduct business with substantial modifications to employee travel and work locations.

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.

We have maintained a “Remote Work 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.

Highlights from the quarter and six months ended March 31, 2022

• Total revenue was $357.2 million during the quarter ended March 31, 2022, an 8% increase from the quarter ended March 31, 2021, and $679.6 million during the six months ended March 31, 2022, a 6% increase from the six months ended March 31, 2021.

• Total revenue for our Scores segment was $183.7 million during the quarter ended March 31, 2022, a 9% increase from the quarter ended March 31, 2021, and $353.2 million during the six months ended March 31, 2022, a 13% increase from the six months ended March 31, 2021.

• Annual Recurring Revenue for our Software segment as of March 31, 2022 was $550.3 million, a 11% increase from March 31, 2021, excluding divestitures.

• Dollar-Based Net Retention Rate for our Software segment was 110% during the quarter ended March 31, 2022, excluding divestitures.

• Operating income was $152.1 million during the quarter ended March 31, 2022, a 50% increase from the quarter ended March 31, 2021, and $267.6 million during the six months ended March 31, 2022, a 37% increase from the six months ended March 31, 2021.

• Net income was $104.4 million during the quarter ended March 31, 2022, a 52% increase from the quarter ended March 31, 2021, and $189.3 million during the six months ended March 31, 2022, a 22% increase from the six months ended March 31, 2021.

• EPS was $3.95 during the quarter ended March 31, 2022, a 70% increase from the quarter ended March 31, 2021, and $7.02 during the six months ended March 31, 2022, a 34% increase from the six months ended March 31, 2021.

• Cash flows from operations were $247.5 million during the six months ended March 31, 2022, compared with $231.5 million during the six months ended March 31, 2021.

• Cash and cash equivalents were $174.2 million as of March 31, 2022, compared with $195.4 million as of September 30, 2021.

• Total debt balance was $1.79 billion as of March 31, 2022, compared with $1.26 billion as of September 30, 2021.

• Total share repurchases during the quarter ended March 31, 2022 were $264.0 million, compared with $205.2 million during the quarter ended March 31, 2021, and during the six months ended March 31, 2022 were $757.6 million, compared with $255.2 million during the six months ended March 31, 2021.

Key performance metrics for Software segment

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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;

This variability can be the result of the economic trends in our customers’ industries;

individual performance of our customers relative to their competitors;

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

Quarter Ended December 31,

Quarter Ended March 31, Six Months Ended March 31,

2022 2021 2022 2021

(In millions)

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(*) 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.

The amounts for the quarter and six months ended March 31, 2021 excluded these divested product lines and businesses.

Annual Recurring Revenue (“ARR”)

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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

2021 September 30, 2021 December 31, 2021 March 31, 2022

(In millions)

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

The amounts and percentages above excluded these divested product lines and businesses at all dates 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.

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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

2021 September 30, 2021 December 31, 2021 March 31, 2022

Platform 108 % 116 % 123 % 130 % 137 % 143 % 143 % 141 %

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Segment revenues, operating income, and related financial information, including disaggregation of revenue are set forth in Note 8 and Note 11 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

The following tables set forth certain summary information on a segment basis related to our revenues for the quarters and six-month periods ended March 31, 2022 and 2021:

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

Percentage Change

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Total $ 357,195 $ 331,361 100 % 100 % 25,834 8 %

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

Percentage Change

Segment 2022 2021 2022 2021

(In thousands) (In thousands)

Scores $ 353,229 $ 313,370 52 % 49 % $ 39,859 13 %

Software 326,327 330,405 48 % 51 % (4,078) (1) %

Total $ 679,556 $ 643,775 100 % 100 % 35,781 6 %

Quarter Ended March 31, 2022 Compared to Quarter Ended March 31, 2021

Scores segment revenues increased $15.0 million due to an increase of $5.9 million in our business-to-business scores revenue and $9.1 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-business scores revenue was primarily attributable to a higher unit price across several business-to-business offerings and an increase in unsecured originations volume, partially offset by a decrease in mortgage originations volume during the quarter ended March 31, 2022.

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

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

Percentage Change

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Total $ 173,453 $ 162,642 10,811 7 %

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.

Software segment revenues increased $10.8 million due to a $23.5 million increase in our on-premises and SaaS software revenue, partially offset by a $12.7 million decrease in services revenue.

The increase in our on-premises and SaaS software revenue was primarily attributable to an increase in point-in-time recognition due to a large license deal, as well as an increase in over-time recognition due to SaaS growth, partially offset by the C&R business divestiture.

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

The total impact to current quarter revenue from the divestiture was $15.9 million — an $8.1 million decrease from on-premises and SaaS software and a $7.8 million decrease from professional services.

Six Months Ended March 31, 2022 Compared to Six Months Ended March 31, 2021

Scores segment revenues increased $39.9 million due to an increase of $18.8 million in our business-to-business scores revenue and $21.1 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, partially offset by a decrease in mortgage originations volume during the six months ended March 31, 2022.

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

Percentage Change

(In thousands) (In thousands)

On-premises and SaaS software

$ 275,426 $ 252,006 $ 23,420 9 %

Professional services 50,901 78,399 (27,498) (35) %

Total $ 326,327 $ 330,405 (4,078) (1) %

Software segment revenues decreased $4.1 million due to a $27.5 million decrease in services revenue, partially offset by a $23.4 million increase 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.

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

The total impact to current year-to-date revenue from the divestiture was $32.2 million — a $16.4 million decrease from on-premises and SaaS software and a $15.8 million decrease from professional services.

Operating Expenses and Other Income / Expenses

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

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

The following tables set forth certain summary information related to our condensed consolidated statements of income and comprehensive income for the quarters and six-month periods ended March 31, 2022 and 2021:

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

Percentage Change

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Amortization of intangible assets 543 945 — % — % (402) (43) %

Gains on product line asset sales and business divestiture — (7,334) — % (2) % 7,334 (100) %

Total operating expenses 205,138 230,162 57 % 69 % (25,024) (11) %

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Interest expense, net (17,211) (9,943) (5) % (3) % (7,268) 73 %

Other income, net 1,429 2,880 — % 1 % (1,451) (50) %

Other income (expense), net (2,361) 568 (1) % — % (2,929) (516) %

Income before income taxes 132,485 91,824 37 % 28 % 40,661 44 %

Income tax provision 19,861 1,468 6 % — % 18,393 1,253 %

Provision for income taxes 28,102 23,150 8 % 7 % 4,952 21 %

Net income $ 104,383 $ 68,674 29 % 21 % 35,709 52 %

Number of employees at quarter end 3,460 3,953 (493) (12) %

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

Percentage Change

2022 2021 2022 2021

(In thousands) (In thousands)

Revenues $ 679,556 $ 643,775 100 % 100 % $ 35,781 6 %

Operating expenses:

Cost of revenues 140,997 177,861 21 % 28 % (36,864) (21) %

Research and development 75,367 84,263 11 % 13 % (8,896) (11) %

Selling, general and administrative 194,462 191,183 29 % 30 % 3,279 2 %

Amortization of intangible assets 1,087 1,882 — % — % (795) (42) %

Gains on product line asset sales and business divestiture — (7,334) — % (1) % 7,334 (100) %

Total operating expenses 411,913 447,855 61 % 70 % (35,942) (8) %

Operating income 267,643 195,920 39 % 30 % 71,723 37 %

Interest expense, net (29,406) (19,584) (4) % (3) % (9,822) 50 %

Other income (expense), net (932) 3,448 — % 1 % (4,380) (127) %

Income before income taxes 237,305 179,784 35 % 28 % 57,521 32 %

Provision for income taxes 47,963 24,618 7 % 4 % 23,345 95 %

Net income $ 189,342 $ 155,166 28 % 24 % 34,176 22 %

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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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.

Cost of revenues as a percentage of revenues decreased to 20% during the quarter ended March 31, 2022 from 27% during the quarter ended March 31, 2021, primarily due to an increase in license revenue recognized at a point in time, increased sales of our higher-margin Scores products and decreased sales of lower-margin professional services.

The year-to-date period over period decrease in cost of revenues of $36.9 million was primarily attributable to a $30.7 million decrease in personnel and labor costs and a $7.1 million decrease in allocated facilities and infrastructure costs.

Cost of revenues as a percentage of revenues decreased to 21% during the six months ended March 31, 2022 from 28% during the six months ended March 31, 2021, primarily due to an increase in license revenue recognized at a point in time, 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 Software products.

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.

The quarter-over-prior year quarter decrease in research and development expenses of $7.2 million was primarily attributable to a $5.0 million decrease in personnel and labor costs as a result of decreased headcount and a $0.9 million decrease in third-party cloud computing costs.

Research and development expenses as a percentage of revenues decreased to 10% during the quarter ended March 31, 2022 from 13% during the quarter ended March 31, 2021.

The year-to-date period over period decrease in research and development expenses of $8.9 million was primarily attributable to a $4.7 million decrease in personnel and labor costs as a result of decreased headcount and a $1.8 million decrease in third-party cloud computing costs.

Research and development expenses as a percentage of revenues decreased to 11% during the six months ended March 31, 2022 from 13% during the six months ended March 31, 2021.

Selling, General and Administrative

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legal expenses;

business development expenses.

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.

and business development expenses.

The quarter-over-prior year quarter decrease in selling, general and administrative expenses of $0.9 million was primarily attributable to a $3.0 million decrease in personnel and labor costs as a result of decreased headcount, partially offset by $0.9 million increase in insurance costs, and a $0.7 million increase in travel costs.

Selling, general and administrative expenses as a percentage of revenues decreased to 27% during the quarter ended March 31, 2022 from 29% during the quarter ended March 31, 2021.

The year-to-date period over period increase in selling, general and administrative expenses of $3.3 million was primarily attributable to a $1.6 million increase in insurance costs, a $1.4 million increase in facilities and infrastructure costs, a $1.2 million increase in travel activity, and a $0.7 million increase in third-party cloud computing costs, partially offset by a $3.4 million decrease in personnel and labor costs as a result of decreased headcount.

Selling, general and administrative expenses as a percentage of revenues decreased to 29% during the six months ended March 31, 2022 from 30% during the six months ended March 31, 2021.

Amortization of Intangible Assets

Amortization of intangible assets consists of amortization expense related to intangible assets recorded in connection with acquisitions accounted for by the acquisition method of accounting.

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

Amortization expense was $0.5 million during the quarter ended March 31, 2022 compared to $0.9 million during the quarter ended March 31, 2021.

Amortization expense was $1.1 million during the six months ended March 31, 2022 compared to $1.9 million during the six months ended March 31, 2021.

The decrease was primarily attributable to certain assets associated with the divestiture of our C&R business in June 2021.

Gains on Product Line Asset Sales and Business Divestiture

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.

The $7.3 million g ain on product line asset sales and business divestiture during the six months ended March 31, 2021 was attributable to the sale of all assets related to our cyber risk score operations in October 2020 and the sale of certain assets related to our Software operations to an affiliated joint venture in China in December 2020.

Interest Expense, Net

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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 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

Other income, net consists primarily of realized investment gains/losses, exchange rate gains/losses resulting from remeasurement of foreign-currency-denominated receivable and cash balances into their respective functional currencies at period-end market rates, net of the impact of offsetting foreign currency forward contracts, and other non-operating items.

The quarter-over-prior year quarter 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.

Income Tax Provision

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

The quarter-over-prior year quarter increase in interest expense of $7.3 million was primarily attributable to a higher average outstanding debt balance during the quarter ended March 31, 2022.

The year-to-date period over period increase in interest expense of $9.8 million was primarily attributable to a higher average outstanding debt balance during the six months ended March 31, 2022.

Other Income (Expense), Net

Other income (expense), net consists primarily of realized investment gains/losses, exchange rate gains/losses resulting from remeasurement of foreign-currency-denominated receivable and cash balances into their respective functional currencies at period-end market rates, net of the impact of offsetting foreign currency forward contracts, and other non-operating items.

The quarter-over-prior year quarter change in other income (expense), net of $2.9 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 change in other income (expense), net of $4.4 million was primarily attributable to a decrease in net unrealized gains on our supplemental retirement and savings plan.

Provision for Income Taxes

The effective income tax rate was 21.2% and 25.2% during the quarters ended March 31, 2022 and 2021, respectively, and 20.2% and 13.7% during the six months ended March 31, 2022 and 2021, respectively.

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

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

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

The effective tax rates for the six months ended March 31, 2022 and 2021 were both favorably impacted 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.

The decrease in stock price for awards that vested in December 2021 has resulted in a decreased net excess tax benefit for the six months ended March 31, 2022, as compared to the six months ended March 31, 2021.

Operating Income

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

The following tables set forth certain summary information on a segment basis related to our operating income for the quarters and six-month periods ended March 31, 2022 and 2021:

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

Percentage Change

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Unallocated amortization expense (543) (945) 402 (43) %

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

Operating income $ 152,057 $ 101,199 50,858 50 %

Scores Software

Quarter Ended

December 31, Percentage of

March 31, Percentage of

Revenues Quarter Ended

March 31, Percentage of

2022 2021 2022 2021 2022 2021 2022 2021

(In thousands)

(In thousands) (In thousands)

Segment revenues $ 183,742 $ 168,719 100 % 100 % $ 173,453 $ 162,642 100 % 100 %

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Segment operating income $ 162,716 $ 146,542 89 % 87 % $ 53,500 $ 17,200 31 % 11 %

Quarter Ended

December 31, Percentage of

The quarter-over-prior year quarter $50.9 million increase in operating income was primarily attributable to a $26.6 million decrease in segment operating expenses and a $25.8 million increase in segment revenues, partially offset by a $2.3 million increase in corporate expenses.

At the segment level, the quarter-over-prior year quarter $50.2 million increase in segment operating income was the result of a $36.3 million increase in our Software segment operating income and a $16.2 million increase in our Scores segment operating income, partially offset by a $2.3 million increase in corporate expenses.

The quarter-over-prior year quarter $16.2 million increase in Scores segment operating income was due to a $15.0 million increase in segment revenue and a $1.2 million decrease in segment operating expenses.

Segment operating income as a percentage of segment revenue for Scores increased to 89% from 87%.

The quarter-over-prior year quarter $36.3 million increase in Software segment operating income was due to a $25.5 million decrease in segment operating expenses and a $10.8 million increase in segment revenue.

Segment operating income as a percentage of segment revenue for Software increased to 31% from 11%, primarily attributable to the divestiture of our lower-margin C&R business, an increase in license revenue recognized at a point in time, and a decrease in sales of our lower-margin professional services.

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

Percentage Change

Segment 2022 2021

(In thousands) (In thousands)

Scores $ 310,219 $ 269,567 $ 40,652 15 %

Software 87,793 37,884 49,909 132 %

Unallocated corporate expenses (71,468) (63,645) (7,823) 12 %

Total segment operating income 326,544 243,806 82,738 34 %

Unallocated share-based compensation (57,814) (53,338) (4,476) 8 %

Unallocated amortization expense (1,087) (1,882) 795 (42) %

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

Operating income $ 267,643 $ 195,920 71,723 37 %

Scores Software

Six Months Ended

March 31, Percentage of

Revenues Six Months Ended

March 31, Percentage of

2022 2021 2022 2021 2022 2021 2022 2021

(In thousands)

(In thousands) (In thousands)

Segment revenues $ 353,229 $ 313,370 100 % 100 % $ 326,327 $ 330,405 100 % 100 %

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Segment operating income $ 310,219 $ 269,567 88 % 86 % $ 87,793 $ 37,884 27 % 11 %

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.

The year-to-date period over period increase of $71.7 million in operating income was primarily attributable to a $54.8 million decrease in segment operating expenses and a $35.8 million increase in segment revenues, partially offset by a $7.8 million increase in corporate expenses, a $7.3 million decrease in gain on sale of product line assets, and a $4.5 million increase in share-based compensation cost.

At the segment level, the year-to-date period over period increase of $82.7 million in segment operating income was the result of a $49.9 million increase in our Software segment operating income and a $40.6 million increase in our Scores segment operating income, partially offset by a $7.8 million increase in corporate expenses.

The year-to-date period over period $40.6 million increase in Scores segment operating income was attributable to a $39.9 million increase in segment revenue and a $0.8 million decrease in segment operating expenses.

Segment operating income as a percentage of segment revenue for Scores increased to 88% from 86%.

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.

The year-to-date period over period $49.9 million increase in Software segment operating income was due to a $54.0 million decrease in segment operating expenses, partially offset by a $4.1 million decrease in segment revenue.

Segment operating income as a percentage of segment revenue for Software increased to 27% from 11%, primarily attributable to the divestiture of our lower-margin C&R business, an increase in license revenue recognized at a point in time, and a decrease in sales of our lower-margin professional services.

CAPITAL RESOURCES AND LIQUIDITY

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.

As of March 31, 2022, we had $174.2 million in cash and cash equivalents, which included $114.2 million held by our foreign subsidiaries.

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

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Summary of Cash Flows

Quarter Ended December 31, Period-to-Period Change

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

(In thousands)

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Effect of exchange rate changes on cash (1,793) 4,021 (5,814)

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

Increase (decrease) in cash and cash equivalents $ (21,135) $ 40,442 (61,577)

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 $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.

Net cash provided by operating activities increased to $247.5 million during the six months ended March 31, 2022 from $231.5 million during the six months ended March 31, 2021.

The $16.0 million increase was primarily attributable to a $34.2 million increase in net income and an $18.5 million increase in non-cash items, partially offset by a $36.7 million decrease that resulted from timing of receipts and payments in our ordinary course of business.

Cash Flows from Investing Activities

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.

Net cash used in investing activities was $3.7 million for the six months ended March 31, 2022 as compared to net cash provided of $1.7 million for the six months ended March 31, 2021.

The $5.4 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 $155.4 million for the quarter ended December 31, 2021 from $99.8 million for the quarter ended December 31, 2020.

Net cash used in financing activities increased to $263.2 million for the six months ended March 31, 2022 from $196.8 million for the six months ended March 31, 2021.

The $66.4 million increase was primarily attributable to a $510.5 million increase in repurchases of common stock and a $136.8 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 $38.8 million decrease in taxes paid related to net share settlement of equity awards.

Repurchases of Common Stock

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 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

In January 2022, our Board of Directors approved a new stock repurchase program following the completion of our previous program.

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

Pursuant to our previously-authorized stock repurchase programs and the January 2022 program, we repurchased approximately 579,875 shares and 1,823,494 shares of our common stock at a total repurchase price of $264.0 million and $757.6 million during the quarter and six months ended March 31, 2022, respectively.

As of March 31, 2022, we had $400.2 million remaining under the January 2022 program.

Revolving Line of Credit and Term Loan

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.

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.

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) a base rate, which is the greatest of (a) the prime rate, (b) the Federal Funds rate plus 0.500% and (c) the one-month LIBOR rate plus 1.000%, plus, in each case, an applicable margin, or (ii) an adjusted LIBOR rate plus an applicable margin.

The applicable margin for base rate borrowings ranges from 0% to 0.750% and for LIBOR borrowings ranges from 1.000% to 1.750%, and is determined based on our consolidated leverage ratio.

In addition, we must pay credit facility fees.

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

The credit facility contains certain restrictive covenants including 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.

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.

In addition, we have a term loan in an initial principal amount of $300 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.

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

As of March 31, 2022, we had $215.0 million in borrowings outstanding under the revolving credit facility at a weighted-average interest rate of 1.932%, and $296.3 million in outstanding balance of the term loan at an interest rate of 1.955%, of which $381.3 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 March 31, 2022.

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

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

As of December 31, 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

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.

As of March 31, 2022, 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.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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Capitalized commission costs are amortized on a straight-line basis over ten years — determined using a portfolio approach — based on the transfer of goods or services to which the assets relate, taking into consideration both the initial and future contracts as we do not typically pay a commission on a contract renewal.

The amortization costs are included in selling, general, and administrative expenses of our condensed consolidated statements of income and comprehensive income.

The amortization costs are included in selling, general, and administrative expenses of our consolidated statements of income and comprehensive income.

We apply a practical expedient to recognize the incremental costs of obtaining contracts as an expense when incurred if the amortization period of the assets that we otherwise would have recognized is one year or less.

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We estimate our current tax liability using currently enacted tax rates and laws and assess temporary differences that result from differing treatments of certain items for tax and accounting purposes.

These differences result in deferred tax assets and liabilities recorded on our condensed consolidated balance sheets using the currently enacted tax rates and laws that will apply to taxable income for the years in which those tax assets are expected to be realized or settled.

These differences result in deferred tax assets and liabilities recorded on our consolidated balance sheets using the currently enacted tax rates and laws that will apply to taxable income for the years in which those tax assets are expected to be realized or settled.

We then assess the likelihood our deferred tax assets will be realized and to the extent we believe realization is not more likely than not, we establish a valuation allowance.

34 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis