FAIR ISAAC CORP 10-Q

Item 1. Financial Statements FAIR ISAAC CORPORATION CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited) June 30, 2022 September 30, 2021 (In thousands, except par value data) Assets Current assets: Cash and cash equivalents $ 155,062 $ 195,354 Accounts receivable, net 286,341 312,107 Prepaid expenses and other current assets 31,854 43,513 Total current assets 473,257 550,974 Marketable securities 25,347 31,884 Other investments 1,213 1,312 Property and equipment, net 20,449 27,913 Operating lease right-of-use assets 39,711 47,275 Goodwill 772,673 788,185 Intangible assets, net 2,459 4,099 Deferred income taxes 18,268 20,549 Other assets 103,459 95,585 Total assets $ 1,456,836 $ 1,567,776 Liabilities and Stockholders’ Deficit Current liabilities: Accounts payable $ 17,399 $ 20,749 Accrued compensation and employee benefits 80,194 103,506 Other accrued liabilities 57,776 79,535 Deferred revenue 98,486 105,417 Current maturities on debt 130,000 250,000 Total current liabilities 383,855 559,207 Long-term debt 1,826,671 1,009,018 Operating lease liabilities 42,970 53,670 Other liabilities 50,812 56,823 Total liabilities 2,304,308 1,678,718 Commitments and contingencies Stockholders’ deficit: Preferred stock ($ 0.01 par value; 1,000 shares authorized; none issued and outstanding) — — Common stock ($ 0.01 par value; 200,000 shares authorized, 88,857 shares issued and 25,252 and 27,568 shares outstanding at June 30, 2022 and September 30, 2021, respectively) 253 276 Additional paid-in-capital 1,269,289 1,237,348 Treasury stock, at cost ( 63,605 and 61,289 shares at June 30, 2022 and September 30, 2021, respectively) ( 4,881,304 ) ( 3,857,855 ) Retained earnings 2,867,985 2,585,143 Accumulated other comprehensive loss ( 103,695 ) ( 75,854 ) Total stockholders’ deficit ( 847,472 ) ( 110,942 ) Total liabilities and stockholders’ deficit $ 1,456,836 $ 1,567,776 See accompanying notes. 1 Table of Contents FAIR ISAAC CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME (Unaudited) Quarter Ended June 30, Nine Months Ended June 30, 2022 2021 2022 2021 (In thousands, except per share data) Revenues: On-premises and SaaS software $ 142,537 $ 130,230 $ 417,963 $ 382,236 Professional services 27,074 35,752 77,975 114,151 Scores 179,355 172,202 532,584 485,572 Total revenues 348,966 338,184 1,028,522 981,959 Operating expenses: Cost of revenues 78,691 82,240 219,688 260,101 Research and development 35,880 45,826 111,247 130,089 Selling, general and administrative 93,248 107,729 287,710 298,912 Amortization of intangible assets 532 810 1,619 2,692 Gains on product line asset sales and business divestiture — ( 92,805 ) — ( 100,139 ) Total operating expenses 208,351 143,800 620,264 591,655 Operating income 140,615 194,384 408,258 390,304 Interest expense, net ( 18,721 ) ( 10,018 ) ( 48,127 ) ( 29,602 ) Other income (expense), net ( 1,000 ) 3,526 ( 1,932 ) 6,974 Income before income taxes 120,894 187,892 358,199 367,676 Provision for income taxes 27,394 36,694 75,357 61,312 Net income 93,500 151,198 282,842 306,364 Other comprehensive income (loss): Foreign currency translation adjustments ( 22,496 ) 4,243 ( 27,841 ) 19,445 Comprehensive income $ 71,004 $ 155,441 $ 255,001 $ 325,809 Earnings per share: Basic $ 3.65 $ 5.27 $ 10.75 $ 10.58 Diluted $ 3.61 $ 5.18 $ 10.63 $ 10.38 Shares used in computing earnings per share: Basic 25,634 28,687 26,319 28,967 Diluted 25,867 29,195 26,608 29,505 See accompanying notes. 2 Table of Contents FAIR ISAAC CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT) (Unaudited) Common Stock Additional Paid-in-Capital Treasury Stock Retained Earnings Accumulated Other Comprehensive Loss Total Stockholders’ Deficit (In thousands) Shares Par Value Balance at March 31, 2022 25,982 $ 260 $ 1,242,280 $ ( 4,599,242 ) $ 2,774,485 $ ( 81,199 ) $ ( 663,416 ) Share-based compensation — — 28,549 — — — 28,549 Issuance of treasury stock under employee stock plans 5 1 ( 1,540 ) 361 — — ( 1,178 ) Repurchases of common stock ( 735 ) ( 8 ) — ( 282,423 ) — — ( 282,431 ) Net income — — — — 93,500 — 93,500 Foreign currency translation adjustments — — — — — ( 22,496 ) ( 22,496 ) Balance at June 30, 2022 25,252 $ 253 $ 1,269,289 $ ( 4,881,304 ) $ 2,867,985 $ ( 103,695 ) $ ( 847,472 ) Common Stock Additional Paid-in-Capital Treasury Stock Retained Earnings Accumulated Other Comprehensive Loss Total Stockholders’ Equity (In thousands) Shares Par Value Balance at March 31, 2021 28,829 $ 288 $ 1,181,692 $ ( 3,239,109 ) $ 2,348,225 $ ( 67,793 ) $ 223,303 Share-based compensation — — 30,004 — — — 30,004 Issuance of treasury stock under employee stock plans 46 1 ( 532 ) 2,604 — — 2,073 Repurchases of common stock ( 489 ) ( 5 ) ( 40,000 ) ( 245,978 ) — — ( 285,983 ) Net income — — — — 151,198 — 151,198 Foreign currency translation adjustments — — — — — 4,243 4,243 Balance at June 30, 2021 28,386 $ 284 $ 1,171,164 $ ( 3,482,483 ) $ 2,499,423 $ ( 63,550 ) $ 124,838 Common Stock Additional Paid-in-Capital Treasury Stock Retained Earnings Accumulated Other Comprehensive Loss Total Stockholders’ Deficit (In thousands) Shares Par Value Balance at September 30, 2021 27,568 $ 276 $ 1,237,348 $ ( 3,857,855 ) $ 2,585,143 $ ( 75,854 ) $ ( 110,942 ) Share-based compensation — — 86,363 — — — 86,363 Issuance of treasury stock under employee stock plans 242 3 ( 54,422 ) 16,509 — — ( 37,910 ) Repurchases of common stock ( 2,558 ) ( 26 ) — ( 1,039,958 ) — — ( 1,039,984 ) Net income — — — — 282,842 — 282,842 Foreign currency translation adjustments — — — — — ( 27,841 ) ( 27,841 ) Balance at June 30, 2022 25,252 $ 253 $ 1,269,289 $ ( 4,881,304 ) $ 2,867,985 $ ( 103,695 ) $ ( 847,472 ) Common Stock Additional Paid-in-Capital Treasury Stock Retained Earnings Accumulated Other Comprehensive Loss Total Stockholders’ Equity (In thousands) Shares Par Value Balance at September 30, 2020 29,096 $ 291 $ 1,218,583 $ ( 2,997,856 ) $ 2,193,059 $ ( 82,995 ) $ 331,082 Share-based compensation — — 83,342 — — — 83,342 Issuance of treasury stock under employee stock plans 321 3 ( 90,761 ) 16,568 — — ( 74,190 ) Repurchases of common stock ( 1,031 ) ( 10 ) ( 40,000 ) ( 501,195 ) — — ( 541,205 ) Net income — — — — 306,364 — 306,364 Foreign currency translation adjustments — — — — — 19,445 19,445 Balance at June 30, 2021 28,386 $ 284 $ 1,171,164 $ ( 3,482,483 ) $ 2,499,423 $ ( 63,550 ) $ 124,838 See accompanying notes. 3 Table of Contents FAIR ISAAC CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) Nine Months Ended June 30, 2022 2021 (In thousands) Cash flows from operating activities: Net income $ 282,842 $ 306,364 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 15,819 20,066 Share-based compensation 86,363 84,099 Deferred income taxes 1,825 ( 11,064 ) Net (gain) loss on marketable securities 7,985 ( 4,706 ) Non-cash operating lease costs 12,094 12,056 Provision for doubtful accounts 975 551 Gains on product line asset sales and business divestiture — ( 100,139 ) Net loss on sales and abandonment of property and equipment 210 107 Changes in operating assets and liabilities: Accounts receivable 12,134 56,655 Prepaid expenses and other assets 4,945 5,172 Accounts payable ( 2,978 ) ( 4,165 ) Accrued compensation and employee benefits ( 22,355 ) ( 24,990 ) Other liabilities ( 33,166 ) ( 5,388 ) Deferred revenue ( 2,069 ) ( 2,556 ) Net cash provided by operating activities 364,624 332,062 Cash flows from investing activities: Purchases of property and equipment ( 5,232 ) ( 5,792 ) Proceeds from sales of marketable securities 6,575 2,294 Purchases of marketable securities ( 8,022 ) ( 5,121 ) Proceeds from product line asset sales and business divestiture 2,257 146,428 Purchase of equity investment — ( 210 ) Net cash provided by (used in) investing activities ( 4,422 ) 137,599 Cash flows from financing activities: Proceeds from revolving line of credit and term loan 1,010,000 429,000 Payments on revolving line of credit and term loan ( 855,500 ) ( 208,000 ) Proceeds from issuance of senior notes 550,000 — Payments on debt issuance costs ( 8,819 ) — Payments on finance leases — ( 177 ) Proceeds from issuance of treasury stock under employee stock plans 11,117 14,580 Taxes paid related to net share settlement of equity awards ( 49,027 ) ( 88,770 ) Repurchases of common stock ( 1,048,027 ) ( 541,205 ) Net cash used in financing activities ( 390,256 ) ( 394,572 ) Effect of exchange rate changes on cash ( 10,238 ) 5,129 Increase (decrease) in cash and cash equivalents ( 40,292 ) 80,218 Cash and cash equivalents, beginning of period 195,354 157,394 Cash and cash equivalents, end of period $ 155,062 $ 237,612 Supplemental disclosures of cash flow information: Cash paid for income taxes, net of refunds of $ 1,021 and $ 289 during the nine-month periods ended June 30, 2022 and 2021, respectively $ 45,984 $ 34,465 Cash paid for interest $ 52,058 $ 36,764 Supplemental disclosures of non-cash investing and financing activities: Purchase of property and equipment included in accounts payable $ 11 $ 564 See accompanying notes. 4 Table of Contents FAIR ISAAC CORPORATION NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. Nature of Business Fair Isaac Corporation Fair Isaac Corporation (NYSE: FICO) (together with its consolidated subsidiaries, the “Company,” which may also be referred to in this report as “we,” “us,” “our,” or “FICO”) is a leading applied analytics company. 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. Principles of Consolidation and Basis of Presentation We have prepared the accompanying unaudited interim condensed consolidated financial statements in accordance with the instructions to Form 10-Q and the applicable accounting guidance. Consequently, we have not necessarily included all information and footnotes required for audited financial statements. In our opinion, the accompanying unaudited interim condensed consolidated financial statements reflect all adjustments (consisting only of normal recurring adjustments, except as otherwise indicated) necessary for a fair presentation of our financial position and results of operations. These unaudited condensed consolidated financial statements and notes thereto should be read in conjunction with our audited consolidated financial statements and notes thereto presented in our Annual Report on Form 10-K for the fiscal year ended September 30, 2021. The interim financial information contained in this report is not necessarily indicative of the results to be expected for any other interim period or for the entire fiscal year. The condensed consolidated financial statements include the accounts of FICO and its subsidiaries. All intercompany accounts and transactions have been eliminated. During the fourth quarter of fiscal 2021, we consolidated our operating segment structure from three to two by merging Applications and Decision Management Software segments into the new Software segment. As a result, we modified the presentation of our segment financial information with retrospective application to all prior periods presented. Refer to Note 18 - Segment Information to the consolidated financial statements included in Part II, Item 8 of our 2021 Annual Report on Form 10-K for further information. In addition, effective beginning in the fourth quarter of fiscal 2021, we changed the classification of revenue from transactional and maintenance, professional services, and license to on-premises and SaaS software, professional services and scores, which is reflected in our condensed consolidated statements of income and comprehensive income, as well as our disclosures on disaggregation of revenue, to better align with our business strategy. Previously reported amounts in the condensed consolidated statements of income and comprehensive income and notes to the condensed consolidated financial statements were adjusted to conform to the current presentation. Use of Estimates We make estimates and assumptions that affect the amounts reported in the financial statements and the disclosures made in the accompanying notes. For example, we use estimates in determining the appropriate levels of various accruals; variable considerations included in the transaction price and standalone selling price of each performance obligation for our customer contracts; labor hours in connection with fixed-fee service contracts; the amount of our tax provision; and the realizability of deferred tax assets. We also use estimates in determining the remaining economic lives and carrying values of acquired intangible assets, property and equipment, and other long-lived assets. In addition, we use assumptions to estimate the fair value of reporting units and share-based compensation. Actual results may differ from our estimates. 5 Table of Contents As the impact of the COVID-19 pandemic continues to evolve, estimates and assumptions about future events and their effects cannot be determined with certainty and therefore require increased judgment. These estimates and assumptions may change in future periods and will be recognized in the condensed consolidated financial statements as new events occur and additional information becomes known. To the extent our actual results differ materially from those estimates and assumptions, our future financial statements could be affected. For more information, see Part II, Item 1A “Risk Factors” of this Quarterly Report on Form 10-Q. New Accounting Pronouncements Recent Accounting Pronouncements Not Yet Adopted 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, Revenue from Contacts with Customers , 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 condensed consolidated financial statements. We do not expect that any other recently issued accounting pronouncements will have a significant effect on our financial statements. 2. Fair Value Measurements Fair value is defined as the price that would be received from the sale of an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The accounting guidance establishes a three-level hierarchy for disclosure that is based on the extent and level of judgment used to estimate the fair value of assets and liabilities. • Level 1 - uses unadjusted quoted prices that are available in active markets for identical assets or liabilities. Our Level 1 assets were comprised of money market funds and certain marketable securities and our Level 1 liabilities included senior notes as of June 30, 2022 and September 30, 2021. • Level 2 - uses inputs other than quoted prices included in Level 1 that are either directly or indirectly observable through correlation with market data. These include quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; and inputs to valuation models or other pricing methodologies that do not require significant judgment because the inputs used in the model, such as interest rates and volatility, can be corroborated by readily observable market data. We did not have any assets or liabilities that are valued using inputs identified under a Level 2 hierarchy as of June 30, 2022 and September 30, 2021. • Level 3 - uses one or more significant inputs that are unobservable and supported by little or no market activity, and that reflect the use of significant management judgment. Level 3 assets and liabilities include those whose fair value measurements are determined using pricing models, discounted cash flow methodologies or similar valuation techniques, and significant management judgment or estimation. We did not have any assets or liabilities that are valued using inputs identified under a Level 3 hierarchy as of June 30, 2022 and September 30, 2021. 6 Table of Contents The following tables represent financial assets that we measured at fair value on a recurring basis at June 30, 2022 and September 30, 2021: June 30, 2022 Active Markets for Identical Instruments (Level 1) Fair Value as of June 30, 2022 (In thousands) Assets: Cash equivalents (1) $ 30,718 $ 30,718 Marketable securities (2) 25,347 25,347 Total $ 56,065 $ 56,065 September 30, 2021 Active Markets for Identical Instruments (Level 1) Fair Value as of September 30, 2021 (In thousands) Assets: Cash equivalents (1) $ 194 $ 194 Marketable securities (2) 31,884 31,884 Total $ 32,078 $ 32,078 (1) Included in cash and cash equivalents on our condensed consolidated balance sheets at June 30, 2022 and September 30, 2021. Not included in these tables are cash deposits of $ 124.3 million and $ 195.2 million at June 30, 2022 and September 30, 2021, respectively. (2) Represents securities held under a supplemental retirement and savings plan for certain officers and senior management employees, which are distributed upon termination or retirement of the employees. Included in marketable securities on our condensed consolidated balance sheets at June 30, 2022 and September 30, 2021. See Note 7 for the fair value of our senior notes. There were no transfers between Level 1, Level 2, and Level 3 of the fair value hierarchy during the quarters and nine-month periods ended June 30, 2022 and 2021. 3. Derivative Financial Instruments We use derivative instruments to manage risks caused by fluctuations in foreign exchange rates. The primary objective of our derivative instruments is to protect the value of foreign-currency-denominated receivable and cash balances from the effects of volatility in foreign exchange rates that might occur prior to conversion to their functional currencies. We principally utilize foreign currency forward contracts, which enable us to buy and sell foreign currencies in the future at fixed exchange rates and economically offset changes in foreign exchange rates. We routinely enter into contracts to offset exposures denominated in the British pound, Euro, and Singapore dollar. Foreign currency-denominated receivable and cash balances are remeasured at foreign exchange rates in effect on the balance sheet date with the effects of changes in foreign exchange rates reported in other income (expense), net. The forward contracts are not designated as hedges and are marked to market through other income (expense), net. Fair value changes in the forward contracts help mitigate the changes in the value of the remeasured receivable and cash balances attributable to changes in foreign exchange rates. The forward contracts are short-term in nature and typically have average maturities at inception of less than three months . 7 Table of Contents The following tables summarize our outstanding foreign currency forward contracts, by currency, at June 30, 2022 and September 30, 2021: June 30, 2022 Contract Amount Fair Value Foreign Currency USD USD (In thousands) Sell foreign currency: Euro (EUR) EUR 15,800 $ 16,372 $ — Buy foreign currency: British pound (GBP) GBP 8,100 $ 9,800 $ — Singapore dollar (SGD) SGD 4,315 $ 3,100 $ — September 30, 2021 Contract Amount Fair Value Foreign Currency USD USD (In thousands) Sell foreign currency: Euro (EUR) EUR 17,100 $ 19,829 $ — Buy foreign currency: British pound (GBP) GBP 11,467 $ 15,400 $ — Singapore dollar (SGD) SGD 6,650 $ 4,900 $ — The foreign currency forward contracts were entered into on June 30, 2022 and September 30, 2021, respectively; therefore, their fair value was $ 0 on each of these dates. Gains (losses) on derivative financial instruments were recorded in our condensed consolidated statements of income and comprehensive income as a component of other income (expense), net, and consisted of the following: Quarter Ended June 30, Nine Months Ended June 30, 2022 2021 2022 2021 (In thousands) Gains (losses) on foreign currency forward contracts $ ( 1,272 ) $ 88 $ ( 1,286 ) $ 3,003 4. Goodwill and Intangible Assets Amortization expense associated with our intangible assets is reflected as a separate operating expense caption — amortization of intangible assets — and is excluded from cost of revenues and selling, general and administrative expenses within the accompanying condensed consolidated statements of income and comprehensive income. Amortization expense consisted of the following: Quarter Ended June 30, Nine Months Ended June 30, 2022 2021 2022 2021 (In thousands) Completed technology $ 125 $ 257 $ 375 $ 902 Customer contracts and relationships 407 510 1,244 1,659 Non-compete agreements — 43 — 131 Total $ 532 $ 810 $ 1,619 $ 2,692 8 Table of Contents Estimated future intangible asset amortization expense associated with intangible assets existing at June 30, 2022 was as follows: Year Ending September 30, (In thousands) 2022 (excluding the nine months ended June 30, 2022) $ 442 2023 1,100 2024 917 Total $ 2,459 The following table summarizes changes to goodwill during the nine months ended June 30, 2022, both in total and as allocated to our segments. We have not recognized any goodwill impairment losses to date. Scores Software Total (In thousands) Balance at September 30, 2021 $ 146,648 $ 641,537 $ 788,185 Foreign currency translation adjustment — ( 15,512 ) ( 15,512 ) Balance at June 30, 2022 $ 146,648 $ 626,025 $ 772,673 5. Composition of Certain Financial Statement Captions The following table presents the composition of property and equipment, net at June 30, 2022 and September 30, 2021: June 30, 2022 September 30, 2021 (In thousands) Property and equipment, net: Property and equipment $ 121,907 $ 124,966 Less: accumulated depreciation and amortization ( 101,458 ) ( 97,053 ) Total $ 20,449 $ 27,913 6. 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 . Borrowings under the credit facility can be used for working capital and general corporate purposes and may also be used for the refinancing of existing debt, acquisitions, and the repurchase of our common stock. Interest on amounts borrowed under the credit facility is based on (i) an adjusted base rate, which is the greatest of (a) the prime rate, (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 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. 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. As of June 30, 2022, we had $ 380.0 million in borrowings outstanding under the revolving credit facility at a weighted-average interest rate of 2.974 %, and $ 292.5 million in outstanding balance of the term loan at an interest rate of 2.684 %, of which $ 542.5 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 June 30, 2022. 9 Table of Contents 7. Senior Notes On May 8, 2018, we issued $ 400 million of senior notes in a private offering to qualified institutional investors (the “2018 Senior Notes”). The 2018 Senior Notes require interest payments semi-annually at a rate of 5.25 % per annum and will mature on May 15, 2026 . On December 6, 2019, we issued $ 350 million of senior notes in a private offering to qualified institutional investors (the “2019 Senior Notes”). 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. The following table presents the face values and fair values for the Senior Notes at June 30, 2022 and September 30, 2021: June 30, 2022 September 30, 2021 Face Value (*) Fair Value Face Value (*) Fair Value (In thousands) The 2018 Senior Notes $ 400,000 $ 388,000 $ 400,000 $ 453,000 The 2019 Senior Notes and the 2021 Senior Notes 900,000 801,000 350,000 357,000 Total $ 1,300,000 $ 1,189,000 $ 750,000 $ 810,000 (*) The carrying value of the Senior Notes was the face value reduced by the net debt issuance costs of $ 15.0 million and $ 9.0 million at June 30, 2022 and September 30, 2021, respectively. 8. Revenue from Contracts with Customers Disaggregation of Revenue The following tables provide information about disaggregated revenue by primary geographical market: Quarter Ended June 30, 2022 Scores Software Total Percentage (Dollars in thousands) Americas $ 177,892 $ 115,331 $ 293,223 84 % Europe, Middle East and Africa 1,051 36,324 37,375 11 % Asia Pacific 412 17,956 18,368 5 % Total $ 179,355 $ 169,611 $ 348,966 100 % Quarter Ended June 30, 2021 Scores Software Total Percentage (Dollars in thousands) Americas $ 165,539 $ 103,627 $ 269,166 80 % Europe, Middle East and Africa 2,988 44,881 47,869 14 % Asia Pacific 3,675 17,474 21,149 6 % Total $ 172,202 $ 165,982 $ 338,184 100 % 10 Table of Contents Nine Months Ended June 30, 2022 Scores Software Total Percentage (Dollars in thousands) Americas $ 518,695 $ 319,180 $ 837,875 81 % Europe, Middle East and Africa 3,796 107,850 111,646 11 % Asia Pacific 10,093 68,908 79,001 8 % Total $ 532,584 $ 495,938 $ 1,028,522 100 % Nine Months Ended June 30, 2021 Scores Software Total Percentage (Dollars in thousands) Americas $ 468,039 $ 311,323 $ 779,362 79 % Europe, Middle East and Africa 10,343 132,749 143,092 15 % Asia Pacific 7,190 52,315 59,505 6 % Total $ 485,572 $ 496,387 $ 981,959 100 % The following table provides information about disaggregated revenue for our Software segment by deployment method: Quarter Ended June 30, Percentage of revenues Nine Months Ended June 30, Percentage of revenues 2022 2021 2022 2021 2022 2021 2022 2021 (Dollars in thousands) On-premises software $ 70,689 $ 63,536 50 % 49 % $ 205,943 $ 193,449 49 % 51 % SaaS software 71,848 66,694 50 % 51 % 212,020 188,787 51 % 49 % Total on-premises and SaaS software $ 142,537 $ 130,230 100 % 100 % $ 417,963 $ 382,236 100 % 100 % The following table provides information about disaggregated revenue for our Software segment by product features: Quarter Ended June 30, Percentage of revenues Nine Months Ended June 30, Percentage of revenues 2022 2021 2022 2021 2022 2021 2022 2021 (Dollars in thousands) Platform software (*) $ 27,806 $ 14,178 20 % 11 % $ 89,680 $ 43,615 21 % 11 % Non-platform software 114,731 116,052 80 % 89 % 328,283 338,621 79 % 89 % Total on-premises and SaaS software $ 142,537 $ 130,230 100 % 100 % $ 417,963 $ 382,236 100 % 100 % (*) The FICO platform software is a set of interoperable capabilities which use software assets owned and/or governed by FICO for building solutions and services which conform to FICO architectural standards based on key elements of Cloud Native Computing design principles. These standards encompass shared security context and access using FICO standard application programming interfaces. 11 Table of Contents The following table provides information about disaggregated revenue for our Software segment by timing of revenue recognition: Quarter Ended June 30, Percentage of revenues Nine Months Ended June 30, Percentage of revenues 2022 2021 2022 2021 2022 2021 2022 2021 (Dollars in thousands) Software recognized at a point in time (1) $ 19,869 $ 12,566 14 % 10 % $ 53,568 $ 37,304 13 % 10 % Software recognized over contract term (2) 122,668 117,664 86 % 90 % 364,395 344,932 87 % 90 % Total on-premises and SaaS software $ 142,537 $ 130,230 100 % 100 % $ 417,963 $ 382,236 100 % 100 % (1) Includes license portion of our on-premises subscription software and perpetual license, both of which are recognized when the software is made available to the customer, or at the start of the subscription. (2) Includes maintenance portion and usage-based fees of our on-premises subscription software, maintenance revenue on perpetual licenses, as well as SaaS revenue. The following table provides information about disaggregated revenue for our Scores segment by distribution method: Quarter Ended June 30, Percentage of revenues Nine Months Ended June 30, Percentage of revenues 2022 2021 2022 2021 2022 2021 2022 2021 (Dollars in thousands) Business-to-business Scores $ 119,010 $ 115,862 66 % 67 % $ 357,221 $ 335,325 67 % 69 % Business-to-consumer Scores 60,345 56,340 34 % 33 % 175,363 150,247 33 % 31 % Total $ 179,355 $ 172,202 100 % 100 % $ 532,584 $ 485,572 100 % 100 % We derive a substantial portion of revenues from our contracts with the three major consumer reporting agencies, TransUnion, Equifax and Experian. Revenues collectively generated by agreements with these customers accounted for 41 % and 38 % of our total revenues in the quarters ended June 30, 2022 and 2021, respectively, with all three consumer reporting agencies each contributing more than 10% of our total revenues in each of the quarters ended June 30, 2022 and 2021. Revenues collectively generated by agreements with these customers accounted for 39 % and 37 % of our total revenues in the nine months ended June 30, 2022 and 2021, respectively, with two and three consumer reporting agencies each contributing more than 10% of our total revenues in the nine months ended June 30, 2022 and 2021, respectively. Contract Balances We record a receivable when we satisfy a performance obligation prior to invoicing if only the passage of time is required before payment is due or if we have an unconditional right to consideration before we satisfy a performance obligation. We record a contract asset when we satisfy a performance obligation prior to invoicing but our right to consideration is conditional. We record deferred revenue when the payment is made or due before we satisfy a performance obligation. 12 Table of Contents Receivables at June 30, 2022 and September 30, 2021 consisted of the following: June 30, 2022 September 30, 2021 (In thousands) Billed $ 162,007 $ 198,305 Unbilled 171,954 155,408 333,961 353,713 Less: allowance for doubtful accounts ( 4,012 ) ( 4,154 ) Net receivables 329,949 349,559 Less: long-term receivables (*) ( 43,608 ) ( 37,452 ) Short-term receivables (*) $ 286,341 $ 312,107 (*) Short-term receivables and long-term receivables were recorded in accounts receivable, net and other assets, respectively, within the accompanying condensed consolidated balance sheets. Deferred revenue primarily relates to our maintenance and SaaS contracts billed annually in advance and generally recognized ratably over the term of the service period. Significant changes in the deferred revenues balances are as follows: Nine Months Ended June 30, 2022 2021 Deferred revenues, beginning balance (*) $ 110,763 $ 122,141 Revenue recognized that was included in the deferred revenues balance at the beginning of the period ( 85,377 ) ( 78,551 ) Increases due to billings, excluding amounts recognized as revenue during the period 79,516 78,658 Reclassified as liabilities related to assets held for sale — ( 16,671 ) Deferred revenues, ending balance (*) $ 104,902 $ 105,577 (*) Deferred revenues at June 30, 2022 included current portion of $ 98.5 million and long-term portion of $ 6.4 million that were recorded in deferred revenue and other liabilities, respectively, within the condensed consolidated balance sheets. Deferred revenues at September 30, 2021 included current portion of $ 105.4 million and long-term portion of $ 5.4 million that were recorded in deferred revenue and other liabilities, respectively, within the condensed consolidated balance sheets. Payment terms and conditions vary by contract type, although terms generally include a requirement of payment within 30 to 60 days. In instances where the timing of revenue recognition differs from the timing of invoicing, we have determined our contracts generally do not include a significant financing component. The primary purpose of our invoicing terms is to provide customers with simplified and predictable ways of purchasing our products and services, not to provide customers with financing or to receive financing from our customers. Examples include multi-year on-premises licenses that are invoiced annually with revenue recognized upfront and invoicing at the beginning of a subscription term with revenue recognized ratably over the contract period. Performance Obligations Revenue allocated to remaining performance obligations represents contracted revenue that will be recognized in future periods, which is comprised of deferred revenue and amounts that will be invoiced and recognized as revenue in future periods. This does not include: • Usage-based revenue that will be recognized in future periods from on-premises software subscriptions; • Consumption-based variable fees from SaaS software that will be recognized in the distinct service period during which it is earned; and • Revenue from variable considerations that will be recognized in accordance with the “right-to-invoice” practical expedient, such as fees from our professional services billed based on a time and materials basis. 13 Table of Contents Revenue allocated to remaining performance obligations was $ 283.7 million as of June 30, 2022, approximately 50 % of which we expect to recognize over the next 15 months and the remainder thereafter. Revenue allocated to remaining performance obligations was $ 289.0 million as of September 30, 2021. 9. Income Taxes Effective Tax Rate The effective income tax rate was 22.7 % and 19.5 % during the quarters ended June 30, 2022 and 2021, respectively, and 21.0 % and 16.7 % during the nine months ended June 30, 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 nine months ended June 30, 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 nine months ended June 30, 2022, as compared to the nine months ended June 30, 2021. The total unrecognized tax benefit for uncertain tax positions was estimated to be $ 14.0 million and $ 10.9 million at June 30, 2022 and September 30, 2021, respectively. We recognize interest expense related to unrecognized tax benefits and penalties as part of the provision for income taxes in our condensed consolidated statements of income and comprehensive income. We accrued interest of $ 0.7 million and $ 0.4 million related to unrecognized tax benefits as of June 30, 2022 and September 30, 2021, respectively. 10. Earnings per Share The following table presents reconciliations for the numerators and denominators of basic and diluted earnings per share (“EPS”) for the quarters and nine-month periods ended June 30, 2022 and 2021: Quarter Ended June 30, Nine Months Ended June 30, 2022 2021 2022 2021 (In thousands, except per share data) Numerator for diluted and basic earnings per share: Net income $ 93,500 $ 151,198 $ 282,842 $ 306,364 Denominator — share: Basic weighted-average shares 25,634 28,687 26,319 28,967 Effect of dilutive securities 233 508 289 538 Diluted weighted-average shares 25,867 29,195 26,608 29,505 Earnings per share: Basic $ 3.65 $ 5.27 $ 10.75 $ 10.58 Diluted $ 3.61 $ 5.18 $ 10.63 $ 10.38 We exclude the options to purchase shares of common stock in the computation of the diluted EPS where the exercise price of the options exceeds the average market price of our common stock as their inclusion would be antidilutive. There were approximately 43,000 and 12,000 options excluded for the quarters ended June 30, 2022 and 2021, respectively. There were approximately 32,000 and 12,000 options excluded for nine months ended June 30, 2022 and 2021, respectively. 14 Table of Contents 11. Segment Information During the fourth quarter of our fiscal 2021, we reevaluated our operating segments to better align with how our chief operating decision maker (“CODM”), who is our Chief Executive Officer, evaluates performance and allocates resources. The key factors evaluated included our evolving platform strategies, our go-to market considerations, and sales of our product lines and businesses during fiscal 2021, and in particular the divestiture of our Collections and Recovery (“C&R”) business in June 2021, among others. As a result, we consolidated our operating segment structure from three to two by merging Applications and Decision Management Software segments into the new Software segment. Based on this change, we determined we have two reportable segments and revised prior comparative periods to conform to the current period segment presentation. The new segments are as follows: • Scores. This 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 streams and decision-making processes. This segment also includes our business-to-consumer (“B2C”) scoring solutions, including our myFICO.com subscription offerings. • Software . This 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. These offerings are available to our customers as SaaS or as on-premises software. Our CODM evaluates segment financial performance based on segment revenues and segment operating income. Segment operating expenses consist of direct and indirect costs principally related to personnel, facilities, IT infrastructure, consulting, travel and depreciation. Indirect costs are allocated to the segments generally based on relative segment revenues, fixed rates established by management based upon estimated expense contribution levels and other assumptions that management considers reasonable. We do not allocate broad-based incentive expense, share-based compensation expense, restructuring and acquisition-related expense, amortization expense, various corporate charges and certain other income and expense measures to our segments. These income and expense items are not allocated because they are not considered in evaluating the segment’s operating performance. Our CODM does not evaluate the financial performance of each segment based on its respective assets or capital expenditures; rather, depreciation amounts are allocated to the segments from their internal cost centers as described above. The following tables summarize segment information for the quarters and nine-month periods ended June 30, 2022 and 2021: Quarter Ended June 30, 2022 Scores Software Unallocated Corporate Expenses Total (In thousands) Segment revenues: On-premises and SaaS software $ — $ 142,537 $ — $ 142,537 Professional services — 27,074 — 27,074 Scores 179,355 — — 179,355 Total segment revenues 179,355 169,611 — 348,966 Segment operating expense ( 19,207 ) ( 122,048 ) ( 38,015 ) ( 179,270 ) Segment operating income $ 160,148 $ 47,563 $ ( 38,015 ) 169,696 Unallocated share-based compensation expense ( 28,549 ) Unallocated amortization expense ( 532 ) Operating income 140,615 Unallocated interest expense, net ( 18,721 ) Unallocated other expense, net ( 1,000 ) Income before income taxes $ 120,894 Depreciation expense $ 182 $ 3,565 $ 26 $ 3,773 15 Table of Contents Quarter Ended June 30, 2021 Scores Software Unallocated Corporate Expenses Total (In thousands) Segment revenues: On-premises and SaaS software $ — $ 130,230 $ — $ 130,230 Professional services — 35,752 — 35,752 Scores 172,202 — — 172,202 Total segment revenues 172,202 165,982 — 338,184 Segment operating expense ( 25,418 ) ( 145,796 ) ( 33,820 ) ( 205,034 ) Segment operating income $ 146,784 $ 20,186 $ ( 33,820 ) 133,150 Unallocated share-based compensation expense ( 30,761 ) Unallocated amortization expense ( 810 ) Unallocated gains on product line asset sales and business divestiture 92,805 Operating income 194,384 Unallocated interest expense, net ( 10,018 ) Unallocated other income, net 3,526 Income before income taxes $ 187,892 Depreciation expense $ 159 $ 4,854 $ 38 $ 5,051 Nine Months Ended June 30, 2022 Scores Software Unallocated Corporate Expenses Total (In thousands) Segment revenues: On-premises and SaaS software $ — $ 417,963 $ — $ 417,963 Professional services — 77,975 — 77,975 Scores 532,584 — — 532,584 Total segment revenues 532,584 495,938 — 1,028,522 Segment operating expense ( 62,217 ) ( 360,582 ) ( 109,483 ) ( 532,282 ) Segment operating income $ 470,367 $ 135,356 $ ( 109,483 ) 496,240 Unallocated share-based compensation expense ( 86,363 ) Unallocated amortization expense ( 1,619 ) Operating income 408,258 Unallocated interest expense, net ( 48,127 ) Unallocated other expense, net ( 1,932 ) Income before income taxes $ 358,199 Depreciation expense $ 563 $ 11,249 $ 83 $ 11,895 16 Table of Contents Nine Months Ended June 30, 2021 Scores Software Unallocated Corporate Expenses Total (In thousands) Segment revenues: On-premises and SaaS software $ — $ 382,236 $ — $ 382,236 Professional services — 114,151 — 114,151 Scores 485,572 — — 485,572 Total segment revenues 485,572 496,387 — 981,959 Segment operating expense ( 69,221 ) ( 438,317 ) ( 97,465 ) ( 605,003 ) Segment operating income $ 416,351 $ 58,070 $ ( 97,465 ) 376,956 Unallocated share-based compensation expense ( 84,099 ) Unallocated amortization expense ( 2,692 ) Unallocated gains on product line asset sales and business divestiture 100,139 Operating income 390,304 Unallocated interest expense, net ( 29,602 ) Unallocated other income, net 6,974 Income before income taxes $ 367,676 Depreciation expense $ 520 $ 15,224 $ 116 $ 15,860 12. Contingencies We are in disputes with certain customers regarding amounts owed in connection with the sale of certain of our products and services. We also have had claims asserted by former employees relating to compensation and other employment matters. We are also involved in various other claims and legal actions arising in the ordinary course of business. We record litigation accruals for legal matters which are both probable and estimable. For legal proceedings for which there is a reasonable possibility of loss (meaning those losses for which the likelihood is more than remote but less than probable), we have determined we do not have material exposure on an aggregate basis. 17 Table of Contents