FAIR ISAAC CORP 10-K

Item 8. Financial Statements and Supplementary Data REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the stockholders and the Board of Directors of Fair Isaac Corporation Bozeman, Montana Opinions on the Financial Statements and Internal Control over Financial Reporting We have audited the accompanying consolidated balance sheets of Fair Isaac Corporation and subsidiaries (the "Company") as of September 30, 2023 and 2022, the related consolidated statements of income and comprehensive income, stockholders' equity (deficit), and cash flows, for each of the three years in the period ended September 30, 2023, and the related notes (collectively referred to as the "financial statements"). We also have audited the Company’s internal control over financial reporting as of September 30, 2023, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of September 30, 2023 and 2022, and the results of operations and cash flows for each of the three years in the period ended September 30, 2023, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of September 30, 2023, based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO. Basis for Opinions The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s report on Internal Control over Financial Reporting . Our responsibility is to express an opinion on these financial statements and an opinion on the Company’s internal control over financial reporting based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions. Definition and Limitations of Internal Control over Financial Reporting A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. 48 Table of Contents Critical Audit Matter The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates. Revenue Recognition – Contracts with Customers – Refer to Note 1 and Note 11 to the financial statements Critical Audit Matter Description Revenue is recognized when control of the promised goods or services is transferred to the Company’s customers, in an amount that reflects the consideration to which the Company expects to be entitled to in exchange for those goods or services. The Company’s revenue is primarily derived from on-premises software and software-as-a-service (SaaS) subscriptions, professional services, and scoring services. For contracts with customers that contain various combinations of products and services, the Company evaluates whether the products or services are distinct — distinct products or services will be accounted for as separate performance obligations, while non-distinct products or services are combined with others to form a single performance obligation. For on-premises software, which includes a term-based license and post-contract support or maintenance, the transaction price is either a fixed fee, or a usage-based fee — sometimes subject to a guaranteed minimum. Any usage-based fees not subject to a guaranteed minimum or earned in excess of the minimum amount are recognized when the subsequent usage occurs. For SaaS products, the Company estimates the total variable consideration at contract inception — subject to any constraints that may apply — and updates the estimates as new information becomes available and recognizes the amount ratably over the SaaS service period, unless the Company determines it is appropriate to allocate the variable amount to each distinct service period and recognize revenue as each distinct service period is performed. The Company’s professional services include software implementation, consulting, model development and training. The transaction price can be a fixed amount or a variable amount based upon the time and materials expended. Revenue on fixed-price services is recognized using an input method based on labor hours expended, which the Company believe provides a faithful depiction of the transfer of services. The Company’s scoring services include both business-to-business and business-to-consumer offerings. The Company’s business-to-business scoring services typically include a license that grants consumer reporting agencies the right to use the scoring solutions in exchange for a usage-based royalty. Revenue is generally recognized when the usage occurs. Business-to-consumer offerings provide consumers with access to their FICO® Scores and credit reports, as well as other value-add services. These are provided as either a one-time or ongoing subscription service renewed monthly or annually, all with a fixed consideration. Given the complexity of certain of the Company’s contracts, together with the judgment involved in identifying performance obligations and estimating variable consideration, auditing the related revenue required both extensive audit effort due to the volume and complexity of the contracts and a high degree of auditor judgment when performing audit procedures and evaluating the results of those procedures . How the Critical Audit Matter Was Addressed in the Audit Our audit procedures related to revenue recognition over the Company’s identification of performance obligations and estimation of variable consideration, included the following, among others: • We tested the effectiveness of controls over contract revenue, including management’s controls over the identification of performance obligations and estimation of variable consideration. • We selected a sample of contracts and performed the following procedures: ◦ Obtained and read the contract, including master agreements, renewal agreements, and other source documents that were part of the contract. ◦ Confirmed the terms of the contract directly with the customer, including whether there are terms not formally included in the contract that may impact the identification of performance obligations and revenue recognition and performed alternative procedures in the event of nonreplies. 49 Table of Contents ◦ Tested management’s identification of the performance obligations within the customer contract, including whether material rights that gave rise to a performance obligation were identified. ◦ Tested management’s estimation of variable consideration in the transaction price by evaluating the reasonableness of the inputs used in management’s estimates. /s/ Deloitte & Touche LLP San Diego, CA November 8, 2023 We have served as the Company’s auditor since 2004. 50 Table of Contents FAIR ISAAC CORPORATION CONSOLIDATED BALANCE SHEETS September 30, 2023 2022 (In thousands, except par value data) Assets Current assets: Cash and cash equivalents $ 136,778 $ 133,202 Accounts receivable, net 387,947 322,410 Prepaid expenses and other current assets 31,723 29,103 Total current assets 556,448 484,715 Marketable securities 33,014 24,515 Other investments 1,223 1,135 Property and equipment, net 10,966 17,580 Operating lease right-of-use assets 25,703 36,688 Goodwill 773,327 761,067 Intangible assets, net 917 2,017 Deferred income taxes 59,136 11,803 Other assets 114,547 102,514 Total assets $ 1,575,281 $ 1,442,034 Liabilities and Stockholders’ Deficit Current liabilities: Accounts payable $ 19,009 $ 17,273 Accrued compensation and employee benefits 102,471 97,893 Other accrued liabilities 59,478 66,248 Deferred revenue 136,730 120,045 Current maturities on debt 50,000 30,000 Total current liabilities 367,688 331,459 Long-term debt 1,811,658 1,823,669 Operating lease liabilities 23,903 39,192 Other liabilities 60,022 49,661 Total liabilities 2,263,271 2,243,981 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 24,770 and 25,154 shares outstanding at September 30, 2023 and September 30, 2022, respectively) 248 252 Additional paid-in-capital 1,350,713 1,299,588 Treasury stock, at cost ( 64,087 and 63,703 shares at September 30, 2023 and September 30, 2022, respectively) ( 5,324,865 ) ( 4,935,769 ) Retained earnings 3,388,059 2,958,684 Accumulated other comprehensive loss ( 102,145 ) ( 124,702 ) Total stockholders’ deficit ( 687,990 ) ( 801,947 ) Total liabilities and stockholders’ deficit $ 1,575,281 $ 1,442,034 See accompanying notes. 51 Table of Contents FAIR ISAAC CORPORATION CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME Year Ended September 30, 2023 2022 2021 (In thousands, except per share data) Revenues: On-premises and SaaS software $ 640,182 $ 564,751 $ 517,888 Professional services 99,547 105,876 144,501 Scores 773,828 706,643 654,147 Total revenues 1,513,557 1,377,270 1,316,536 Operating expenses: Cost of revenues 311,053 302,174 332,462 Research and development 159,950 146,758 171,231 Selling, general and administrative 400,565 383,863 396,281 Amortization of intangible assets 1,100 2,061 3,255 Restructuring charges — — 7,957 Gains on product line asset sales and business divestiture ( 1,941 ) — ( 100,139 ) Total operating expenses 870,727 834,856 811,047 Operating income 642,830 542,414 505,489 Interest expense, net ( 95,546 ) ( 68,967 ) ( 40,092 ) Other income (expense), net 6,340 ( 2,138 ) 7,745 Income before income taxes 553,624 471,309 473,142 Provision for income taxes 124,249 97,768 81,058 Net income 429,375 373,541 392,084 Other comprehensive income (loss): Foreign currency translation adjustments 22,557 ( 48,848 ) 7,141 Comprehensive income $ 451,932 $ 324,693 $ 399,225 Earnings per share: Basic $ 17.18 $ 14.34 $ 13.65 Diluted $ 16.93 $ 14.18 $ 13.40 Shares used in computing basic earnings per share: Basic 24,986 26,042 28,734 Diluted 25,367 26,347 29,260 See accompanying notes. 52 Table of Contents FAIR ISAAC CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT) Years Ended September 30, 2023, 2022 and 2021 Common Stock Additional Paid-in-Capital Treasury Stock Retained Earnings Accumulated Other Comprehensive Loss Total Stockholders’ Equity (Deficit) (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 — — 111,700 — — — 111,700 Issuance of treasury stock under employee stock plans 349 4 ( 88,953 ) 18,222 — — ( 70,727 ) Repurchases of common stock ( 1,877 ) ( 19 ) ( 3,982 ) ( 878,221 ) — — ( 882,222 ) Net income — — — — 392,084 — 392,084 Foreign currency translation adjustments — — — — — 7,141 7,141 Balance at September 30, 2021 27,568 276 1,237,348 ( 3,857,855 ) 2,585,143 ( 75,854 ) ( 110,942 ) Share-based compensation — — 115,355 — — — 115,355 Issuance of treasury stock under employee stock plans 264 3 ( 53,115 ) 18,196 — — ( 34,916 ) Repurchases of common stock ( 2,678 ) ( 27 ) — ( 1,096,110 ) — — ( 1,096,137 ) Net income — — — — 373,541 — 373,541 Foreign currency translation adjustments — — — — — ( 48,848 ) ( 48,848 ) Balance at September 30, 2022 25,154 252 1,299,588 ( 4,935,769 ) 2,958,684 ( 124,702 ) ( 801,947 ) Share-based compensation — — 123,847 — — — 123,847 Issuance of treasury stock under employee stock plans 231 2 ( 72,722 ) 18,245 — — ( 54,475 ) Repurchases of common stock ( 615 ) ( 6 ) — ( 407,341 ) — — ( 407,347 ) Net income — — — — 429,375 — 429,375 Foreign currency translation adjustments — — — — — 22,557 22,557 Balance at September 30, 2023 24,770 $ 248 $ 1,350,713 $ ( 5,324,865 ) $ 3,388,059 $ ( 102,145 ) $ ( 687,990 ) See accompanying notes. 53 Table of Contents FAIR ISAAC CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS Year Ended September 30, 2023 2022 2021 (In thousands) Cash flows from operating activities: Net income $ 429,375 $ 373,541 $ 392,084 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 14,638 20,465 25,592 Share-based compensation 123,847 115,355 112,457 Deferred income taxes ( 47,378 ) 7,816 ( 5,955 ) Net (gain) loss on marketable securities ( 2,908 ) 9,269 ( 4,569 ) Non-cash operating lease costs 14,708 15,922 16,102 Provision of doubtful accounts 1,475 2,800 652 Gains on product line asset sales and business divestiture ( 1,941 ) — ( 100,139 ) Net loss on sales and abandonment of property and equipment 547 193 333 Changes in operating assets and liabilities: Accounts receivable ( 70,117 ) ( 31,557 ) 24,496 Prepaid expenses and other assets ( 11,904 ) 7,368 ( 5,722 ) Accounts payable 2,236 ( 2,802 ) ( 2,354 ) Accrued compensation and employee benefits 4,631 ( 3,637 ) ( 13,144 ) Other liabilities ( 7,057 ) ( 28,830 ) ( 20,502 ) Deferred revenue 18,763 23,547 4,486 Net cash provided by operating activities 468,915 509,450 423,817 Cash flows from investing activities: Purchases of property and equipment ( 4,237 ) ( 6,029 ) ( 7,569 ) Proceeds from sales of marketable securities 5,032 8,063 7,237 Purchases of marketable securities ( 10,623 ) ( 9,963 ) ( 9,039 ) Proceeds from product line asset sales and business divestiture, net of cash transferred ( 6,126 ) 2,258 147,431 Purchase of equity investment — — ( 210 ) Net cash provided by (used in) investing activities ( 15,954 ) ( 5,671 ) 137,850 Cash flows from financing activities: Proceeds from revolving line of credit and term loan 407,000 1,039,000 682,000 Payments on revolving line of credit and term loan ( 402,000 ) ( 988,250 ) ( 259,000 ) Proceeds from issuance of senior notes — 550,000 — Payments on debt issuance costs — ( 8,819 ) ( 1,488 ) Payments on finance leases — — ( 176 ) Proceeds from issuance of treasury stock under employee stock plans 22,198 16,026 20,881 Taxes paid related to net share settlement of equity awards ( 76,673 ) ( 50,942 ) ( 91,609 ) Repurchases of common stock ( 405,526 ) ( 1,104,180 ) ( 874,179 ) Net cash used in financing activities ( 455,001 ) ( 547,165 ) ( 523,571 ) Effect of exchange rate changes on cash 5,616 ( 18,766 ) ( 136 ) Increase (decrease) in cash and cash equivalents 3,576 ( 62,152 ) 37,960 Cash and cash equivalents, beginning of year 133,202 195,354 157,394 Cash and cash equivalents, end of year $ 136,778 $ 133,202 $ 195,354 Supplemental disclosures of cash flow information: Cash paid for income taxes, net of refunds of $ 640 , $ 1,090 and $ 464 during the years ended September 30, 2023, 2022 and 2021, respectively $ 152,775 $ 65,332 $ 71,486 Cash paid for interest $ 96,877 $ 57,208 $ 37,955 Supplemental disclosures of non-cash investing and financing activities: Unsettled repurchases of common stock $ 1,821 $ — $ 8,043 Purchase of property and equipment included in accounts payable $ 106 $ 22 $ 71 See accompanying notes. 54 Table of Contents FAIR ISAAC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended September 30, 2023, 2022 and 2021 1. Nature of Business and Summary of Significant Accounting Policies 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 more than 100 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 lenders, consumer reporting agencies, 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 The consolidated financial statements include the accounts of FICO and its subsidiaries. All intercompany accounts and transactions have been eliminated. Use of Estimates We make estimates and assumptions that affect the amounts reported in the financial statements and the disclosures made in the accompanying notes. For example, we use estimates in determining the 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. Cash and Cash Equivalents Cash and cash equivalents consist of cash in banks and investments with an original maturity of 90 days or less at time of purchase. 55 Table of Contents FAIR ISAAC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended September 30, 2023, 2022 and 2021 Fair Value of Financial Instruments The fair value of certain of our financial instruments, including cash and cash equivalents, receivables, other current assets, accounts payable, accrued compensation and employee benefits, other accrued liabilities and amounts outstanding under our revolving line of credit and term loan, approximate their carrying amounts because of the short-term maturity of these instruments. The fair values of our cash and cash equivalents and marketable securities investments are disclosed in Note 4. The fair value of our derivative instruments is disclosed in Note 5. The fair value of our senior notes is disclosed in Note 9. Investments We categorize our investments in debt and equity instruments as trading, available-for-sale or held-to-maturity at the time of purchase. Trading securities are carried at fair value with unrealized gains or losses included in other income (expense). Available-for-sale securities are carried at fair value measurements using quoted prices in active markets for identical assets or liabilities with unrealized gains or losses included in accumulated other comprehensive income (loss). Held-to-maturity securities are carried at amortized cost. Dividends and interest income are accrued as earned. Realized gains and losses are determined on a specific identification basis and are included in other income (expense). We review marketable securities for impairment whenever circumstances and situations change such that there is an indication that the carrying amounts may not be recovered. We did not classify any securities as held-to-maturity or available-for-sale during each of the three years ended September 30, 2023, 2022 and 2021. Investments with remaining maturities over one year are classified as long-term investments. Concentration of Risk Financial instruments that potentially expose us to concentrations of risk consist primarily of cash and cash equivalents, marketable securities and accounts receivable, which are generally not collateralized. Our policy is to place our cash, cash equivalents, and marketable securities with high quality financial institutions, commercial corporations and government agencies in order to limit the amount of credit exposure. We have established guidelines relative to diversification and maturities for maintaining safety and liquidity. We generally do not require collateral from our customers, but our credit extension and collection policies include analyzing the financial condition of potential customers, establishing credit limits, monitoring payments, and aggressively pursuing delinquent accounts. We maintain allowances for potential credit losses. A significant portion of our revenues are derived from the sales of products and services to the financial services industries. Property and Equipment Property and equipment are recorded at cost less accumulated depreciation and amortization. Major renewals and improvements are capitalized, while repair and maintenance costs are expensed as incurred. Depreciation and amortization charges are calculated using the straight-line method over the following estimated useful lives: Estimated Useful Life Data processing equipment and software 3 years to 6 years Office furniture and equipment 3 years to 7 years Leasehold improvements Shorter of estimated useful life or lease term The cost and accumulated depreciation for property and equipment sold, retired or otherwise disposed of are removed from the applicable accounts and resulting gains or losses are recorded in our consolidated statements of income and comprehensive income. Depreciation and amortization on property and equipment totaled $ 10.1 million, $ 15.2 million and $ 20.3 million during fiscal 2023, 2022 and 2021, respectively. 56 Table of Contents FAIR ISAAC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended September 30, 2023, 2022 and 2021 Internal-Use Software Costs incurred to develop internal-use software during the application development stage are capitalized and reported at cost. Application development stage costs generally include costs associated with internal-use software configuration, coding, installation and testing. Costs of significant upgrades and enhancements that result in additional functionality are also capitalized whereas costs incurred for maintenance and minor upgrades and enhancements are expensed as incurred. Capitalized costs are amortized using the straight-line method over three years . Software development costs required to be capitalized for internal-use software have not been material to date. Capitalized Software and Research and Development Costs Software development costs relating to products to be sold in the normal course of business are expensed as incurred as research and development costs until technological feasibility is established. Technological feasibility for our products occurs approximately concurrently with the general release of our products; accordingly, we have not capitalized any development or production costs. Costs we incur to maintain and support our existing products after the general release of the product are expensed in the period they are incurred and included in research and development costs in our consolidated statements of income and comprehensive income. Goodwill, Acquisition Intangibles and Other Long-Lived Assets Goodwill represents the excess of cost over the fair value of identifiable assets acquired and liabilities assumed in business combinations. We assess goodwill for impairment for each of our reporting units on an annual basis during our fourth fiscal quarter using a July 1 measurement date unless circumstances require a more frequent measurement. We have determined that our reporting units are the same as our reportable segments. When evaluating goodwill for impairment, we may first perform an assessment qualitatively whether it is more likely than not that a reporting unit's carrying amount exceeds its fair value, referred to as a “step zero” approach. If, based on the review of the qualitative factors, we determine it is not more likely than not that the fair value of a reporting unit is less than its carrying value, we would bypass the two-step impairment test. Events and circumstances we consider in performing the “step zero” qualitative assessment include macro-economic conditions, market and industry conditions, internal cost factors, share price fluctuations, and the operational stability and overall financial performance of the reporting units. If we conclude that it is more likely than not that a reporting unit's fair value is less than its carrying amount, we would perform the first step (“step one”) of the two-step impairment test and calculate the estimated fair value of the reporting unit by using discounted cash flow valuation models and by comparing our reporting units to guideline publicly-traded companies. These methods require estimates of our future revenues, profits, capital expenditures, working capital, and other relevant factors, as well as selecting appropriate guideline publicly-traded companies for each reporting unit. We estimate these amounts by evaluating historical trends, current budgets, operating plans, industry data, and other relevant factors. Alternatively, we may bypass the qualitative assessment described above for any reporting unit in any period and proceed directly to performing step one of the goodwill impairment test. For fiscal 2021, we consolidated our operating segment structure from three to two by merging our Applications and Decision Management Software segments into the new Software segment. We performed a step one quantitative impairment test on the Software and Scores reporting units before and immediately following the change in reporting units. There was a substantial excess of fair value over carrying value for the reporting units and we determined goodwill was not impaired for any of our reporting units before or after the change for fiscal 2021. For fiscal 2022 and 2023, we performed a step zero qualitative analysis for our annual assessment of goodwill impairment. After evaluating and weighing all relevant events and circumstances, we concluded that it is not more likely than not that the fair value of either of our reporting units was less than their carrying amounts. Consequently, we did not perform a step one quantitative analysis and determined goodwill was not impaired for either of our reporting units for fiscal 2022 and 2023. We amortize our finite-lived intangible assets which result from our acquisitions over the following estimated useful lives: Estimated Useful Life Completed technology 5 years to 10 years Customer contracts and relationships 5 years to 10 years Non-compete agreements 2 years 57 Table of Contents FAIR ISAAC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended September 30, 2023, 2022 and 2021 Our intangible assets that have finite useful lives and other long-lived assets are assessed for potential impairment when there is evidence that events and circumstances related to our financial performance and economic environment indicate the carrying amount of the assets may not be recoverable. When impairment indicators are identified, we test for impairment using undiscounted cash flows. If such tests indicate impairment, then we measure and record the impairment as the difference between the carrying value of the asset and the fair value of the asset. We did not recognize any impairment charges on intangible assets that have finite useful lives or other long-lived assets in fiscal 2023, 2022 and 2021. Revenue Recognition Revenue is recognized when control of the promised goods or services is transferred to our customers, in an amount that reflects the consideration to which we expect to be entitled to in exchange for those goods or services. See Note 11 for further discussion on revenues. Income Taxes We estimate our income taxes based on the various jurisdictions where we conduct business, which involves significant judgment in determining our income tax provision. 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 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. When we establish a valuation allowance or increase this allowance in an accounting period, we record a corresponding income tax expense in our consolidated statements of income and comprehensive income. In assessing the need for the valuation allowance, we consider future taxable income in the jurisdictions we operate; our ability to carry back tax attributes to prior years; an analysis of our deferred tax assets and the periods over which they will be realizable; and ongoing prudent and feasible tax planning strategies. An increase in the valuation allowance would have an adverse impact, which could be material, on our income tax provision and net income in the period in which we record the increase. We recognize and measure benefits for uncertain tax positions using a two-step approach. The first step is to evaluate the tax position taken or expected to be taken in a tax return by determining if the technical merits of the tax position indicate it is more likely than not that the tax position will be sustained upon audit, including resolution of any related appeals or litigation processes. For tax positions more likely than not of being sustained upon audit, the second step is to measure the tax benefit as the largest amount more than 50% likely of being realized upon settlement. Significant judgment is required to evaluate uncertain tax positions and they are evaluated on a quarterly basis. Our evaluations are based upon a number of factors, including changes in facts or circumstances, changes in tax law, correspondence with tax authorities during the course of audits and effective settlement of audit issues. Changes in the recognition or measurement of uncertain tax positions could result in material increases or decreases in our income tax expense in the period in which we make the change, which could have a material impact on our effective tax rate and operating results. Earnings per Share Basic earnings per share are computed on the basis of the weighted-average number of common shares outstanding during the period under measurement. Diluted earnings per share are based on the weighted-average number of common shares outstanding and potential common shares. Potential common shares result from the assumed exercise of outstanding stock options or other potentially dilutive equity instruments, when they are dilutive under the treasury stock method. Comprehensive Income Comprehensive income is the change in our equity (net assets) during each period from transactions and other events and circumstances from non-owner sources. It includes net income and foreign currency translation adjustments. 58 Table of Contents FAIR ISAAC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended September 30, 2023, 2022 and 2021 Foreign Currency and Derivative Financial Instruments We have determined that the functional currency of each foreign operation is the local currency. Assets and liabilities denominated in their local foreign currencies are translated into U.S. dollars at the exchange rate on the balance sheet date. Revenues and expenses are translated at average rates of exchange prevailing during the period. Foreign currency translation adjustments are accumulated as a separate component of consolidated stockholders’ deficit. We utilize derivative instruments to manage market risks associated with fluctuations in certain foreign currency exchange rates as they relate to specific balances of accounts receivable and cash denominated in foreign currencies. We principally utilize foreign currency forward contracts to protect against market risks arising in the normal course of business. Our policies prohibit the use of derivative instruments for the sole purpose of trading for profit on price fluctuations or to enter into contracts that intentionally increase our underlying exposure. All of our foreign currency forward contracts have maturity periods of less than three months. At the end of the reporting period, foreign-currency-denominated assets and liabilities are remeasured into the functional currencies of the reporting entities at current market rates. The change in value from this remeasurement is reported as a foreign exchange gain or loss for that period in other income (expense), net in the accompanying consolidated statements of income and comprehensive income. We recorded transactional foreign exchange gains (losses) of $( 2.6 ) million, $ 1.9 million and $ 0.0 million during fiscal 2023, 2022 and 2021, respectively. Share-Based Compensation We measure share-based compensation cost at the grant date based on the fair value of the award and recognize it as expense, net of estimated forfeitures, over the vesting or service period, as applicable, of the stock award (generally three to four years ). See Note 15 for further discussion of our share-based employee benefit plans. Advertising and Promotion Costs Advertising and promotion costs are expensed as incurred and are included in selling, general and administrative expenses in the accompanying consolidated statements of income and comprehensive income. Advertising and promotion costs totaled $ 9.8 million, $ 8.1 million and $ 6.9 million in fiscal 2023, 2022 and 2021, respectively. 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. The adoption of ASU 2021-08 will not have a significant impact on our consolidated financial statements. We do not expect that any other recently issued accounting pronouncements will have a significant effect on our financial statements. 2. Product Line Asset Sales and Business Divestiture During fiscal 2023, we sold certain assets related to our Siron compliance business within our Software segment, and recorded a gain of $ 1.9 million. 59 Table of Contents FAIR ISAAC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended September 30, 2023, 2022 and 2021 During fiscal 2021, we sold our Collections and Recovery (“C&R”) business to Jonas Collections and Recovery Inc. (“Jonas”), a company in the Jonas Software operating group of Constellation Software Inc. In addition, during fiscal 2021, we sold all assets related to our cyber risk score operations and we sold certain assets related to our Software operations to an affiliated joint venture in China. The gains recognized from these sales were $ 100.1 million, which were recorded in gains on product line asset sales and business divestiture within the accompanying consolidated statements of income and comprehensive income. The C&R business and the assets sold were part of our Software segment. 3. Cash, Cash Equivalents and Marketable Securities The following is a summary of cash, cash equivalents and marketable securities at September 30, 2023 and 2022: September 30, 2023 September 30, 2022 Amortized Cost Fair Value Amortized Cost Fair Value (In thousands) Cash and Cash Equivalents: Cash $ 113,157 $ 113,157 $ 113,888 $ 113,888 Money market funds 23,621 23,621 19,314 19,314 Total $ 136,778 $ 136,778 $ 133,202 $ 133,202 Marketable Securities: Marketable securities $ 31,100 $ 33,014 $ 25,956 $ 24,515 The assets included in marketable securities represent long-term marketable equity 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. These investments are treated as trading securities and recorded at fair value. 4. 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 September 30, 2023 and 2022. • 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 September 30, 2023 and 2022. • 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 September 30, 2023 and 2022. The following tables represent financial assets that we measured at fair value on a recurring basis at September 30, 2023 and 2022: 60 Table of Contents FAIR ISAAC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended September 30, 2023, 2022 and 2021 September 30, 2023 Active Markets for Identical Instruments (Level 1) Fair Value as of September 30, 2023 (In thousands) Assets: Cash equivalents (1) $ 23,621 $ 23,621 Marketable securities (2) 33,014 33,014 Total $ 56,635 $ 56,635 September 30, 2022 Active Markets for Identical Instruments (Level 1) Fair Value as of September 30, 2022 (In thousands) Assets: Cash equivalents (1) $ 19,314 $ 19,314 Marketable securities (2) 24,515 24,515 Total $ 43,829 $ 43,829 (1) Included in cash and cash equivalents on our consolidated balance sheets at September 30, 2023 and 2022. Not included in these tables are cash deposits of $ 113.2 million and $ 113.9 million at September 30, 2023 and 2022, 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 consolidated balance sheets at September 30, 2023 and 2022. See Note 9 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 years ended September 30, 2023, 2022 or 2021. 5. 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 . 61 Table of Contents FAIR ISAAC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended September 30, 2023, 2022 and 2021 The following tables summarize our outstanding foreign currency forward contracts, by currency, at September 30, 2023 and 2022: September 30, 2023 Contract Amount Fair Value Foreign Currency USD USD (In thousands) Sell foreign currency: Euro (EUR) EUR 12,900 $ 13,621 — Buy foreign currency: British pound (GBP) GBP 10,700 $ 13,100 — Singapore dollar (SGD) SGD 8,569 $ 6,300 — September 30, 2022 Contract Amount Fair Value Foreign Currency USD USD (In thousands) Sell foreign currency: Euro (EUR) EUR 13,500 $ 13,158 — Buy foreign currency: British pound (GBP) GBP 11,848 $ 13,100 — Singapore dollar (SGD) SGD 6,169 $ 4,300 — The foreign currency forward contracts were entered into on September 30, 2023 and 2022; therefore, their fair value was $ 0 at each of these dates. Gains (losses) on derivative financial instruments were recorded in our consolidated statements of income and comprehensive income as a component of other income (expense), net, and consisted of the following: Year Ended September 30, 2023 2022 2021 (In thousands) Gain (loss) on foreign currency forward contracts $ 1,625 $ ( 2,748 ) $ 2,064 6. Goodwill and Intangible Assets Intangible assets that are subject to amortization consisted of the following at September 30, 2023 and 2022: September 30, 2023 September 30, 2022 Gross Carrying Amount Accumulated Amortization Net Weighted Average Life in Years Gross Carrying Amount Accumulated Amortization Net Weighted Average Life in Years (In thousands, except average life) Completed technology $ 69,706 $ ( 69,289 ) $ 417 5 $ 67,760 $ ( 66,843 ) $ 917 5 Customer contracts and relationships 3,000 ( 2,500 ) 500 5 3,000 ( 1,900 ) 1,100 5 $ 72,706 $ ( 71,789 ) $ 917 5 $ 70,760 $ ( 68,743 ) $ 2,017 5 62 Table of Contents FAIR ISAAC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended September 30, 2023, 2022 and 2021 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 consolidated statements of income and comprehensive income. Amortization expense consisted of the following: Year Ended September 30, 2023 2022 2021 (In thousands) Completed technology $ 500 $ 500 $ 1,027 Customer contracts and relationships 600 1,561 2,082 Non-compete agreements — — 146 Total $ 1,100 $ 2,061 $ 3,255 At September 30, 2023, estimated future intangible asset amortization expense was $ 0.9 million, which will be recognized in fiscal 2024. The following table summarizes changes to goodwill during fiscal 2023 and 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 — ( 27,118 ) ( 27,118 ) Balance at September 30, 2022 146,648 614,419 761,067 Foreign currency translation adjustment — 12,260 12,260 Balance at September 30, 2023 $ 146,648 $ 626,679 $ 773,327 7. Composition of Certain Financial Statement Captions The following table presents the composition of property and equipment, net and other accrued liabilities at September 30, 2023 and 2022: September 30, 2023 2022 (In thousands) Property and equipment: Data processing equipment and software $ 69,928 $ 76,335 Office furniture and equipment 12,296 14,790 Leasehold improvements 16,743 21,286 Less: accumulated depreciation and amortization ( 88,001 ) ( 94,831 ) Total $ 10,966 $ 17,580 Other accrued liabilities: Interest payable $ 20,770 $ 21,314 Current operating leases 16,336 19,369 Other 22,372 25,565 Total $ 59,478 $ 66,248 63 Table of Contents FAIR ISAAC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended September 30, 2023, 2022 and 2021 8. Revolving Line of Credit and Term Loan We have a $ 600 million unsecured revolving line of credit and a $ 300 million unsecured term loan with a syndicate of banks that mature on August 19, 2026 . Borrowings under the revolving line of credit and term loan 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. The term loan requires principal payments in consecutive quarterly installments of $ 3.75 million on the last business day of each quarter. In November 2022, we amended our credit agreement to replace the LIBOR reference rate with the Secured Overnight Financing Rate (“SOFR”) reference rate. Interest rates on amounts borrowed under the revolving line of credit and term loan are based on (i) an adjusted base rate, which is the greatest of (a) the prime rate, (b) the Federal Funds rate plus 0.5 %, and (c) one-month adjusted term SOFR rate plus 1 %, plus, in each case, an applicable margin, or (ii) an adjusted term SOFR rate plus an applicable margin. The applicable margin for base rate borrowings and for SOFR borrowings is determined based on our consolidated leverage ratio. The applicable margin for base rate borrowings ranges from 0 % to 0.75 % per annum and for SOFR borrowings ranges from 1 % to 1.75 % per annum. In addition, we must pay certain credit facility fees. The revolving line of credit and term loan contain certain restrictive covenants including a maximum consolidated leverage ratio of 3.5 to 1.0, subject to a step up to 4.0 to 1.0 following certain permitted acquisitions and subject to certain conditions, and a minimum interest coverage ratio of 3.0 to 1.0. The credit agreement also contains other covenants typical of unsecured credit facilities. As of September 30, 2023, we had $ 300.0 million in borrowings outstanding under the revolving line of credit at a weighted-average interest rate of 6.678 %, of which $ 35.0 million was classified as a current liability and $ 265.0 million was classified as a long-term liability. In addition, as of September 30, 2023, we had $ 273.8 million in outstanding balance under the term loan at an interest rate of 6.752 %, of which $ 15.0 million was classified as a current liability and $ 258.8 million was classified as a long-term liability. The current and long-term revolving line of credit and term loan liabilities were recorded in current maturities on debt and long-term debt, respectively, within the accompanying consolidated balance sheets. We were in compliance with all financial covenants under this credit agreement as of September 30, 2023. Future principal payments for the term loan are as follows: Year Ending September 30, (In thousands) 2024 $ 15,000 2025 15,000 2026 243,750 Total $ 273,750 9. 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. 64 Table of Contents FAIR ISAAC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended September 30, 2023, 2022 and 2021 The indentures for the Senior Notes contain certain covenants typical of unsecured obligations and we were in compliance as of September 30, 2023. The following table presents the face values and fair values for the Senior Notes at September 30, 2023 and 2022: September 30, 2023 September 30, 2022 Face Value (*) Fair Value Face Value (*) Fair Value (In thousands) The 2018 Senior Notes $ 400,000 $ 386,000 $ 400,000 $ 381,500 The 2019 Senior Notes and the 2021 Senior Notes 900,000 803,250 900,000 767,250 Total $ 1,300,000 $ 1,189,250 $ 1,300,000 $ 1,148,750 (*) The carrying value of the Senior Notes was the face value reduced by the net debt issuance costs of $ 11.5 million and $ 14.3 million at September 30, 2023 and 2022, respectively. Future principal payments for the Senior Notes are as follows: Year Ending September 30, (In thousands) 2026 400,000 2027 — 2028 900,000 Total $ 1,300,000 10. Accelerated Share Repurchase We have authorization to make repurchases of shares of our common stock from time to time in the open market or in negotiated transactions. As part of the broader share repurchase program, we entered into an accelerated share repurchase agreement (“ASR Agreement”) with a financial institution on June 17, 2021 to repurchase $ 200.0 million of our common stock. The ASR Agreement was accounted for as two separate transactions (1) a repurchase of common stock and (2) an equity-linked contract on our own stock. Pursuant to the ASR Agreement, we paid $ 200.0 million to the financial institution and received an initial delivery of 319,400 shares of common stock, which approximated 80 % of the total number of expected shares to be repurchased under the ASR Agreement. The equity-linked contract for the remaining $ 40.0 million, representing remaining shares to be delivered under the ASR Agreement, was recorded as a reduction to stockholders’ equity as of June 30, 2021 and was settled in August 2021 with us receiving 70,127 additional shares. In total, 389,527 shares were repurchased under the ASR Agreement. We were not required to make any additional cash payments or delivery of common stock to the financial institution upon settlement of the agreement. 11. Revenue from Contracts with Customers Contracts with Customers Our revenue is primarily derived from on-premises software and SaaS subscriptions, professional services and scoring services. For contracts with customers that contain various combinations of products and services, we evaluate whether the products or services are distinct — distinct products or services will be accounted for as separate performance obligations, while non-distinct products or services are combined with others to form a single performance obligation. For contracts with multiple performance obligations, the transaction price is allocated to each performance obligation on a relative standalone selling price (“SSP”) basis. Revenue is recognized when control of the promised goods or services is transferred to our customers. 65 Table of Contents FAIR ISAAC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended September 30, 2023, 2022 and 2021 Our on-premises software is primarily sold on a subscription basis, which includes a term-based license and post-contract support or maintenance, both of which generally represent distinct performance obligations and are accounted for separately. The transaction price is either a fixed fee, or a usage-based fee — sometimes subject to a guaranteed minimum. When the amount is fixed, including the guaranteed minimum in a usage-based fee, license revenue is recognized at the point in time when the software is made available to the customer. Maintenance revenue is recognized ratably over the contract period as customers simultaneously consume and receive benefits. Any usage-based fees not subject to a guaranteed minimum or earned in excess of the minimum amount are recognized when the subsequent usage occurs. We occasionally sell software arrangements consisting of on-premises perpetual licenses and maintenance. License revenue is recognized at a point in time when the software is made available to the customer and maintenance revenue is recognized ratably over the contract term. Our SaaS products provide customers with access to and standard support for our software on a subscription basis, delivered through our own infrastructure or third-party cloud services. The SaaS transaction contracts typically include a guaranteed minimum fee per period that allows up to a certain level of usage and a consumption-based variable fee in excess of the minimum threshold; or a consumption-based variable fee not subject to a minimum threshold. The nature of our SaaS arrangements is to provide continuous access to our hosted solutions in the cloud, i.e., a stand-ready obligation that comprises a series of distinct service periods (e.g., a series of distinct daily, monthly or annual periods of service). We estimate the total variable consideration at contract inception — subject to any constraints that may apply — and update the estimates as new information becomes available and recognize the amount ratably over the SaaS service period, unless we determine it is appropriate to allocate the variable amount to each distinct service period and recognize revenue as each distinct service period is performed. Our professional services include software implementation, consulting, model development and training. Professional services are sold either standalone, or together with other products or services and generally represent distinct performance obligations. The transaction price can be a fixed amount or a variable amount based upon the time and materials expended. Revenue on fixed-price services is recognized using an input method based on labor hours expended, which we believe provides a faithful depiction of the transfer of services. Revenue on services provided on a time and materials basis is recognized by applying the “right-to-invoice” practical expedient as the amount to which we have a right to invoice the customer corresponds directly with the value of our performance to the customer. Our scoring services include both business-to-business and business-to-consumer offerings. Our business-to-business scoring services typically include a license that grants consumer reporting agencies the right to use our scoring solutions in exchange for a usage-based royalty. Revenue is generally recognized when the usage occurs. Business-to-consumer offerings provide consumers with access to their FICO ® Scores and credit reports, as well as other value-add services. These are provided as either a one-time or ongoing subscription service renewed monthly or annually, all with a fixed consideration. The nature of the subscription service is a stand-ready obligation to generate credit reports, provide credit monitoring, and other services for our customers, which comprises a series of distinct service periods (e.g., a series of distinct daily, monthly or annual periods of service). Revenue from one-time or monthly subscription services is recognized during the period when service is performed. Revenue from annual subscription services is recognized ratably over the subscription period. Disaggregation of Revenue During fiscal 2021, we sold all assets related to our cyber risk score operations, sold certain assets related to our Software segment to an affiliated joint venture in China, and divested our C&R business. During fiscal 2023, we sold certain assets related to our Siron compliance business. The comparability of the data below is impacted as a result of these divestitures. The following tables provide information about disaggregated revenue by primary geographical market: Year Ended September 30, 2023 Scores Software Total Percentage (Dollars in thousands) Americas $ 763,874 $ 523,076 $ 1,286,950 85 % Europe, Middle East and Africa 5,802 135,562 141,364 9 % Asia Pacific 4,152 81,091 85,243 6 % Total $ 773,828 $ 739,729 $ 1,513,557 100 % 66 Table of Contents FAIR ISAAC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended September 30, 2023, 2022 and 2021 Year Ended September 30, 2022 Scores Software Total Percentage (Dollars in thousands) Americas $ 691,006 $ 439,705 $ 1,130,711 82 % Europe, Middle East and Africa 4,475 142,824 147,299 11 % Asia Pacific 11,162 88,098 99,260 7 % Total $ 706,643 $ 670,627 $ 1,377,270 100 % Year Ended September 30, 2021 Scores Software Total Percentage (Dollars in thousands) Americas $ 633,497 $ 416,436 $ 1,049,933 80 % Europe, Middle East and Africa 11,881 178,515 190,396 14 % Asia Pacific 8,769 67,438 76,207 6 % Total $ 654,147 $ 662,389 $ 1,316,536 100 % The following table provides information about disaggregated revenue for our Software segment by deployment method: Year Ended September 30, Percentage of revenues 2023 2022 2021 2023 2022 2021 (Dollars in thousands) On-premises software $ 292,763 $ 280,649 $ 266,452 46 % 50 % 51 % SaaS software 347,419 284,102 251,436 54 % 50 % 49 % Total on-premises and SaaS software $ 640,182 $ 564,751 $ 517,888 100 % 100 % 100 % The following table provides information about disaggregated revenue for our Software segment by product features: Year Ended September 30, Percentage of revenues 2023 2022 2021 2023 2022 2021 (Dollars in thousands) Platform software ( * ) $ 154,750 $ 116,252 $ 66,884 24 % 21 % 13 % Non-Platform software 485,432 448,499 451,004 76 % 79 % 87 % Total on-premises and SaaS software $ 640,182 $ 564,751 $ 517,888 100 % 100 % 100 % (*) 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. 67 Table of Contents FAIR ISAAC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended September 30, 2023, 2022 and 2021 The following table provides information about disaggregated revenue for our Software segment by timing of revenue recognition: Year Ended September 30, Percentage of revenues 2023 2022 2021 2023 2022 2021 (Dollars in thousands) Software recognized at a point in time (1) $ 72,843 $ 75,647 $ 59,024 11 % 13 % 11 % Software recognized over contract term (2) 567,339 489,104 458,864 89 % 87 % 89 % Total on-premises and SaaS software $ 640,182 $ 564,751 $ 517,888 100 % 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: Year Ended September 30, Percentage of revenues 2023 2022 2021 2023 2022 2021 (Dollars in thousands) Business-to-business Scores $ 560,995 $ 475,442 $ 446,538 72 % 67 % 68 % Business-to-consumer Scores 212,833 231,201 207,609 28 % 33 % 32 % Total $ 773,828 $ 706,643 $ 654,147 100 % 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 %, 39 % and 38 % of our total revenues in fiscal 2023, 2022 and 2021, respectively, with all three consumer reporting agencies each contributing more than 10% of our total revenues in fiscal 2023, and two each contributing more than 10% of our total revenues in fiscal 2022 and 2021. At September 30, 2023, one individual customer accounted for 10% or more of total consolidated receivables. At September 30, 2022, no individual customer accounted for 10% or more of total consolidated receivables. 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. 68 Table of Contents FAIR ISAAC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended September 30, 2023, 2022 and 2021 Receivables at September 30, 2023 and 2022 consisted of the following: September 30, 2023 2022 (In thousands) Billed $ 234,745 $ 203,351 Unbilled 203,896 165,386 438,641 368,737 Less: allowance for doubtful accounts ( 4,978 ) ( 4,218 ) Net receivables 433,663 364,519 Less: long-term receivables ( * ) ( 45,716 ) ( 42,109 ) Short-term receivables ( * ) $ 387,947 $ 322,410 (*) Short-term receivables and long-term receivables were recorded in accounts receivable, net and other assets, respectively, within the accompanying consolidated balance sheets. Activity in the allowance for doubtful accounts was as follows: Year Ended September 30, 2023 2022 (In thousands) Allowance for doubtful accounts, beginning balance $ 4,218 $ 4,154 Add: expense 1,475 2,300 Less: write-offs (net of recoveries) ( 715 ) ( 2,236 ) Allowance for doubtful accounts, ending balance $ 4,978 $ 4,218 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: Year Ended September 30, 2023 2022 (In thousands) Deferred revenues, beginning balance $ 126,560 $ 110,763 Revenue recognized that was included in the deferred revenues balance at the beginning of the period ( 113,341 ) ( 95,286 ) Increases due to billings, excluding amounts recognized as revenue during the period 130,016 111,083 Deferred revenues, ending balance ( * ) $ 143,235 $ 126,560 (*) Deferred revenues at September 30, 2023 included current portion of $ 136.7 million and long-term portion of $ 6.5 million that were recorded in deferred revenue and other liabilities, respectively, within the consolidated balance sheets. Deferred revenues at September 30, 2022 included current portion of $ 120.0 million and long-term portion of $ 6.6 million that were recorded in deferred revenue and other liabilities, respectively, within the 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. 69 Table of Contents FAIR ISAAC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended September 30, 2023, 2022 and 2021 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. Revenue allocated to remaining performance obligations was $ 470.5 million as of September 30, 2023, approximately 51 % of which we expect to recognize over the next 17 months and the remainder thereafter. Revenue allocated to remaining performance obligations was $ 357.4 million as of September 30, 2022. Significant Judgments Our contracts with customers often include promises to transfer multiple products and services to a customer. Determining whether products and services are considered distinct and should be accounted for separately may require significant judgment. Specifically, when implementation service is included in the original software or SaaS offerings, judgment is required to determine if the implementation service significantly modifies or customizes the software or SaaS service in such a way that the risks of providing it and the customization service are inseparable. In rare instances, contracts may include significant modification or customization of the software or SaaS service and will result in the combination of software or SaaS service and implementation service as one performance obligation. We determine the SSPs using data from our historical standalone sales, or, in instances where such information is not available (such as when we do not sell the product or service separately), we consider factors such as the stated contract prices, our overall pricing practices and objectives, go-to-market strategy, size and type of the transactions, and effects of the geographic area on pricing, among others. When the selling price of a product or service is highly variable, we may use the residual approach to determine the SSP of that product or service. Significant judgment may be required to determine the SSP for each distinct performance obligation when it involves the consideration of many market conditions and entity-specific factors discussed above. Significant judgment may be required to determine the timing of satisfaction of a performance obligation in certain professional services contracts with a fixed consideration, in which we measure progress using an input method based on labor hours expended. In order to estimate the total hours of the project, we make assumptions about labor utilization, efficiency of processes, the customer’s specification and IT environment, among others. For certain complex projects, due to the risks and uncertainties inherent with the estimation process and factors relating to the assumptions, actual progress may differ due to the change in estimated total hours. Adjustments to estimates are made in the period in which the facts requiring such revisions become known and, accordingly, recognized revenues are subject to revisions as the contract progresses to completion. Capitalized Commission Costs We capitalize incremental commission fees paid as a result of obtaining customer contracts. Capitalized commission costs, which are recorded in other assets within the accompanying consolidated balance sheets, were $ 58.6 million and $ 53.0 million at September 30, 2023 and 2022, respectively. 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 consolidated statements of income and comprehensive income. The amount of amortization was $ 8.2 million, $ 7.2 million, and $ 6.0 million during the years ended September 30, 2023, 2022 and 2021, respectively. There was no impairment loss in relation to the costs capitalized. 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. These costs are recorded within selling, general, and administrative expenses. 70 Table of Contents FAIR ISAAC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended September 30, 2023, 2022 and 2021 12. Employee Benefit Plans Defined Contribution Plans We sponsor the Fair Isaac Corporation 401(k) plan for eligible employees in the U.S. Under this plan, eligible employees may contribute up to 25 % of compensation, not to exceed statutory limits. We also provide a company matching contribution. Investment in FICO common stock is not an option under this plan. Our contributions into all 401(k) plans, including former-acquired-company-sponsored plans that have since merged into the Fair Isaac Corporation 401(k) plan or have been frozen, totaled $ 8.9 million, $ 8.2 million and $ 9.8 million during fiscal 2023, 2022 and 2021, respectively. Employee Incentive Plans We maintain various employee incentive plans for the benefit of eligible employees, including officers. The awards generally are based upon the achievement of certain financial and performance objectives subject to the discretion of management. For executive officers, such discretion is exercised by the Leadership Development and Compensation Committee of Company’s Board of Directors. Total expenses under our employee incentive plans were $ 57.8 million, $ 55.7 million and $ 58.1 million during fiscal 2023, 2022 and 2021, respectively. 13. Restructuring Charges There were no restructuring charges incurred during fiscal 2023 or 2022. During fiscal 2021, we incurred restructuring charges of $ 8.0 million in employee separation costs due to the elimination of 160 positions throughout the Company. Cash payments for all the employee separation costs were fully paid before the end of fiscal 2022. 14. Income Taxes The provision for income taxes was as follows during fiscal 2023, 2022 and 2021: Year ended September 30, 2023 2022 2021 (In thousands) Current: Federal $ 112,456 $ 50,403 $ 43,437 State 16,844 8,952 7,961 Foreign 42,327 30,597 35,615 171,627 89,952 87,013 Deferred: Federal ( 37,884 ) 8,165 ( 4,602 ) State ( 15,025 ) 507 ( 948 ) Foreign 5,531 ( 856 ) ( 405 ) ( 47,378 ) 7,816 ( 5,955 ) Total provision $ 124,249 $ 97,768 $ 81,058 The foreign provision was based on foreign pre-tax earnings of $ 172.7 million, $ 136.0 million and $ 62.1 million in fiscal 2023, 2022 and 2021, respectively. Current foreign tax expense related to foreign tax withholdings was $ 12.3 million, $ 9.5 million and $ 7.5 million in fiscal 2023, 2022 and 2021, respectively. Foreign withholding tax and related foreign tax credits are included in current tax expense above. 71 Table of Contents FAIR ISAAC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended September 30, 2023, 2022 and 2021 Deferred tax assets and liabilities at September 30, 2023 and 2022 were as follows: September 30, 2023 2022 (In thousands) Deferred tax assets: Loss and credit carryforwards $ 12,309 $ 19,122 Compensation benefits 30,490 29,344 Operating lease liabilities 9,396 13,065 Research and development costs 34,730 — Other assets 17,327 14,744 104,252 76,275 Less: valuation allowance ( 2,183 ) ( 16,635 ) Total deferred tax assets 102,069 59,640 Deferred tax liabilities: Intangible assets ( 7,226 ) ( 14,263 ) Deferred commission ( 14,017 ) ( 12,419 ) Operating lease right-of-use assets ( 6,228 ) ( 8,798 ) Other liabilities ( 15,462 ) ( 12,357 ) Total deferred tax liabilities ( 42,933 ) ( 47,837 ) Deferred tax assets, net $ 59,136 $ 11,803 Based upon the level of historical taxable income and projections for future taxable income over the periods that the deferred tax assets will reverse, management believes it is more likely than not that we will realize the benefits of the deferred tax assets, net of the existing valuation allowance at September 30, 2023. As of September 30, 2023, we had available U.S. federal net operating loss (“NOL”) carryforwards of approximately $ 4.1 million. The U.S. federal NOLs were acquired in connection with our acquisitions of Adeptra in fiscal 2012 and Infoglide in fiscal 2013. The U.S. federal NOL carryforward will expire at various dates beginning in fiscal 2024, if not utilized. Utilization of the U.S. federal NOL is subject to an annual limitation due to the “change in ownership” provisions of the Internal Revenue Code of 1986, as amended. We had available an excess California state research credit of approximately $ 9.2 million as of September 30, 2023. There was approximately $ 2.2 million of foreign tax credit carryforwards as of September 30, 2023. The excess foreign tax credit can be carried forward for 10 years; however, based on enacted law and expected future usage, we have recorded a valuation allowance of $ 2.2 million as of September 30, 2023. A reconciliation of the provision for income taxes, with the amount computed by applying the U.S. federal statutory income tax rate of 21 % to income before provision for income taxes for fiscal 2023, 2022 and 2021 is shown below: Year Ended September 30, 2023 2022 2021 (In thousands) Income tax provision at U.S. federal statutory rate $ 116,261 $ 98,975 $ 99,360 State income taxes, net of U.S. federal benefit 14,135 8,359 7,815 Foreign tax rate differential 9,489 3,058 1,490 Research credits ( 3,600 ) ( 5,932 ) ( 6,795 ) Valuation allowance ( 14,451 ) ( 11,768 ) 3,839 Excess tax benefits relating to share-based compensation ( 949 ) 702 ( 15,573 ) GILTI, FDII, BEAT and FTC ( 9,010 ) ( 2,491 ) ( 4,958 ) Other 12,374 6,865 ( 4,120 ) Recorded income tax provision $ 124,249 $ 97,768 $ 81,058 72 Table of Contents FAIR ISAAC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended September 30, 2023, 2022 and 2021 As of September 30, 2023, we had approximately $ 27.2 million of unremitted earnings of non-U.S. subsidiaries. The Company has not provided deferred tax liabilities for foreign withholding taxes and certain state income taxes on the undistributed earnings and profits from certain non-U.S. subsidiaries that will be permanently reinvested outside the United States. In the event these earnings are later remitted to the U.S., any estimated withholding tax and state income tax due upon remittance of those earnings is expected to be immaterial to the income tax provision. For jurisdictions not permanently reinvested, the Company expects the net impact of any future repatriations to be immaterial to the Company’s overall tax liability. Unrecognized Tax Benefit for Uncertain Tax Positions We conduct business globally and, as a result, file income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. In the normal course of business, we are subject to examination by taxing authorities. With a few exceptions, we are no longer subject to U.S. federal, state, local, or foreign income tax examinations for fiscal years prior to 2019. A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows: Year Ended September 30, 2023 2022 2021 (In thousands) Gross unrecognized tax benefits at beginning of year $ 12,980 $ 10,897 $ 7,994 Gross increases for tax positions in prior years — 593 — Gross decreases for tax positions in prior years ( 1,127 ) — ( 385 ) Gross increases based on tax positions related to the current year 3,650 3,250 5,273 Decreases for settlements and payments ( 523 ) — ( 643 ) Decreases due to statute expiration ( 1,131 ) ( 1,760 ) ( 1,342 ) Gross unrecognized tax benefits at end of year $ 13,849 $ 12,980 $ 10,897 We had $ 13.8 million of total unrecognized tax benefits as of September 30, 2023, including $ 12.7 million of tax benefits that, if recognized, would impact the effective tax rate. Although the timing and outcome of audit settlements are uncertain, it is unlikely there will be a significant reduction of the uncertain tax benefits in the next twelve months. We recognize interest expense and penalties related to unrecognized tax benefits and penalties as part of the provision for income taxes in our consolidated statements of income and comprehensive income. We recognize interest earned related to income tax matters as interest income in our consolidated statements of income and comprehensive income. As of September 30, 2023, we had accrued interest of $ 0.9 million related to the unrecognized tax benefits. 15. Share-Based Employee Benefit Plans Description of Stock Option and Share Plans We maintain the 2021 Long-Term Incentive Plan (the “2021 Plan”). The 2021 Plan authorizes the issuance of up to 5,900,000 shares of our common stock, plus additional shares that become available due to the expiration, forfeiture or cancellation of awards outstanding under the 2012 Long-Term Incentive Plan. Under the terms of the 2021 Plan, the pool of shares available for issuance may be used for all types of equity awards available under the 2021 Plan, which include stock options, stock appreciation rights, restricted stock awards, stock unit awards and other share-based awards. All employees, consultants and advisors of FICO or any subsidiary, as well as all non-employee directors, are eligible to receive awards under the 2021 Plan. The 2021 Plan will remain in effect until the earliest of the following: all shares subject to the Plan are distributed, the Board terminates the Plan, or the tenth anniversary of the effective date of the Plan. Stock option awards have a maximum term of ten years . In general, stock option awards and stock unit awards not subject to market or performance conditions vest annually over four years . Stock unit awards subject to market or performance conditions generally vest annually over three years based on the achievement of specified criteria. At September 30, 2023, there were 4,726,001 shares available for issuance as new awards under the 2021 Plan. 73 Table of Contents FAIR ISAAC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended September 30, 2023, 2022 and 2021 Description of Employee Stock Purchase Plan We maintain the 2019 Employee Stock Purchase Plan (the “2019 Purchase Plan”) under which we are authorized to issue up to 1,000,000 shares of our common stock to eligible employees. Eligible employees may elect to have up to 15 % of their eligible pay withheld through payroll deductions to purchase FICO common stock during semi-annual offering periods. The purchase price of the stock is 85 % of the closing sales price of FICO common stock on the last trading day of each offering period. Offering period means approximately six -month periods commencing (a) on the first trading day on or after September 1 and terminating on the last trading day in the following February, and (b) on the first trading day on or after March 1 and terminating on the last trading day in the following August. At September 30, 2023, there were 852,896 shares available for issuance under the 2019 Purchase Plan. We satisfy stock option exercises, vesting of stock units and the 2019 Purchase Plan issuances from treasury shares. Share-Based Compensation Expense and Related Income Tax Benefits We recorded share-based compensation expense of $ 123.8 million, $ 115.4 million and $ 112.5 million in fiscal 2023, 2022 and 2021, respectively. The total tax benefit related to this share-based compensation expense was $ 13.8 million, $ 13.5 million and $ 14.0 million in fiscal 2023, 2022 and 2021, respectively. As of September 30, 2023, there was $ 194.3 million of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under all equity compensation plans. Total unrecognized compensation cost will be adjusted for future changes in estimated forfeitures. We expect to recognize that cost over a weighted-average period of 2.56 years. In fiscal 2023 we received $ 8.1 million in cash from stock option exercises, with the tax benefit realized for the tax deductions from these exercises of $ 4.0 million. Share-Based Activity Restricted Stock Units The fair value of restricted stock units (“RSUs”) granted is the closing market price of our common stock on the date of grant, adjusted for the expected dividend yield, if applicable. We amortize the fair value on a straight-line basis over the vesting period. The following table summarizes the RSUs activity during fiscal 2023: Shares Weighted-average Grant-date Fair Value (In thousands) Outstanding at September 30, 2022 415 $ 398.07 Granted 167 620.51 Released ( 162 ) 356.97 Forfeited ( 44 ) 449.89 Outstanding at September 30, 2023 376 $ 508.23 The weighted-average fair value of the RSUs granted was $ 620.51 , $ 416.62 and $ 505.70 during fiscal 2023, 2022 and 2021, respectively. The total intrinsic value of the RSUs that vested was $ 101.1 million, $ 97.3 million and $ 156.6 million during fiscal 2023, 2022 and 2021, respectively, determined as of the date of vesting. Performance Share Units Performance share units (“PSUs”) are granted to our senior officers and earned based on pre-established performance goals approved by the Leadership Development and Compensation Committee of our Board of Directors for any given performance period. The range of payout is zero to 200 % of the number of target PSUs, based on the outcome of the performance conditions. We estimate the fair value of the PSUs using the closing market price of our common stock on the date of grant, adjusted for the expected dividend yield if applicable, based on the performance condition that is probable of achievement. We amortize the fair values over the requisite service period for each vesting tranche of the award. We reassess the probability at each reporting period and recognize the cumulative effect of the change in estimate in the period of change. 74 Table of Contents FAIR ISAAC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended September 30, 2023, 2022 and 2021 The following table summarizes the PSUs activity during fiscal 2023: Shares Weighted- average Grant-date Fair Value (In thousands) Outstanding at September 30, 2022 144 $ 432.73 Granted 57 615.45 Released ( 66 ) 428.90 Forfeited ( 20 ) 465.25 Outstanding at September 30, 2023 115 $ 519.54 The weighted-average fair value of the PSUs granted was $ 615.45 , $ 407.49 and $ 506.91 during fiscal 2023, 2022 and 2021, respectively. The total intrinsic value of the PSUs that vested was $ 40.3 million, $ 25.9 million and $ 34.7 million during fiscal 2023, 2022 and 2021, respectively, determined as of the date of vesting. Market Share Units Market share units (“MSUs”) are granted to our senior officers and earned based on our total stockholder return relative to the Russell 3000 Index over performance periods of one , two and three years . We estimate the fair value of MSUs granted using the Monte Carlo valuation model and amortize the fair values over the requisite service period for each vesting tranche of the award. In addition, we do not reverse the compensation cost solely because the market condition is not satisfied, and the award is therefore not earned by the employee, provided the requisite service is rendered. We used the following assumptions to estimate the fair value of our MSUs during fiscal 2023, 2022 and 2021: Year Ended September 30, 2023 2022 2021 Expected volatility in FICO’s stock price 47.3 % 42.3 % 41.3 % Expected volatility in Russell 3000 Index 26.0 % 23.3 % 23.7 % Correlation between FICO and the Russell 3000 Index 73.5 % 74.7 % 77.5 % Risk-free interest rate 4.02 % 0.97 % 0.20 % Average expected dividend yield — % — % — % The expected volatility was determined based on daily historical movements in our stock price and the Russell 3000 Index for the three years preceding the grant date. The correlation between FICO and the Russell 3000 Index was determined based on historical daily stock price movements for the three years preceding the grant date. The risk-free rate was determined based on U.S. Treasury zero-coupon yields over the three-year performance period. Because we have not declared or paid any cash dividends on our common stock since May 2017, and we do not presently plan to pay cash dividends on our common stock in the foreseeable future, we used an expected dividend yield of zero. The following table summarizes the MSUs activity during fiscal 2023: Shares Weighted- average Grant-date Fair Value (In thousands) Outstanding at September 30, 2022 92 $ 586.91 Granted 77 822.96 Released ( 68 ) 502.41 Forfeited ( 14 ) 715.94 Outstanding at September 30, 2023 87 $ 844.24 75 Table of Contents FAIR ISAAC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended September 30, 2023, 2022 and 2021 The weighted-average fair value of the MSUs granted was $ 822.96 , $ 493.66 and $ 471.16 during fiscal 2023, 2022 and 2021, respectively. The total intrinsic value of the MSUs that vested was $ 42.2 million, $ 7.8 million and $ 34.5 million during fiscal 2023, 2022 and 2021, respectively, determined as of the date of vesting. Stock Options We estimate the fair value of stock options granted using the Black-Scholes option valuation model and we amortize the fair value on a straight-line basis over the vesting period. We used the following assumptions to estimate the fair value of our stock options during fiscal 2023, 2022 and 2021: Year Ended September 30, 2023 2022 2021 Stock Options: Weighted-average expected term (years) 5.23 4.43 4.47 Expected volatility (range) 33.4 - 35.5 % 32.9 - 34.1 % 33.6 - 34.4 % Weighted-average volatility 33.5 % 33.2 % 33.9 % Risk-free interest rate (range) 3.40 - 4.49 % 1.18 - 2.85 % 0.29 - 0.73 % Weighted-average expected dividend yield — % — % — % Expected Term. The expected term represents the period that our stock options are expected to be outstanding. We estimate the expected term based on historical experience of similar awards, giving consideration to the contractual terms of the share-based awards, vesting schedules and expectations of future employee behavior. Expected Volatility. We estimate the volatility of our common stock at the date of grant based on a combination of the implied volatility of publicly traded options on our common stock and our historical volatility rate. Risk-Free Interest Rate. The risk-free interest rate assumption is based on observed interest rates appropriate for the term of our employee options. Dividends. We have not declared or paid any cash dividends on our common stock since May 2017, and we do not presently plan to pay cash dividends on our common stock in the foreseeable future. Consequently, we used an expected dividend yield of zero in the years presented. Forfeitures. We use historical data to estimate pre-vesting option forfeitures and record share-based compensation expense only for those awards that are expected to vest. The following table summarizes option activity during fiscal 2023: Shares Weighted- average Exercise Price Weighted- average Remaining Contractual Term Aggregate Intrinsic Value (In thousands) (In years) (In thousands) Outstanding at September 30, 2022 209 $ 247.56 Granted 58 779.98 Exercised ( 38 ) 214.00 Forfeited ( 2 ) 390.14 Outstanding at September 30, 2023 227 $ 387.95 3.55 $ 109,242 Exercisable at September 30, 2023 153 $ 236.84 2.30 $ 96,648 Vested or expected to vest at September 30, 2023 221 $ 377.24 3.46 $ 108,544 76 Table of Contents FAIR ISAAC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended September 30, 2023, 2022 and 2021 The weighted-average fair value of options granted was $ 289.54 , $ 134.91 and $ 139.11 during fiscal 2023, 2022 and 2021, respectively. The aggregate intrinsic value of options outstanding at September 30, 2023 was calculated as the difference between the exercise price of the underlying options and the market price of our common stock for the 227,000 outstanding options that had exercise prices lower than the $ 868.53 market price of our common stock at September 30, 2023. The total intrinsic value of options exercised was $ 16.7 million, $ 14.5 million and $ 15.8 million during fiscal 2023, 2022 and 2021, respectively, determined as of the date of exercise. Employee Stock Purchase Plan The compensation expense on the 2019 Purchase Plan arises from the 15 % discount offered to participants. A total of 21,876 , 32,528 , and 42,402 shares of our common stock were issued under the 2019 Purchase Plan during fiscal 2023, 2022 and 2021, respectively. The weighted-average purchase price was $ 646.37 , $ 393.95 , and $ 389.61 per share for fiscal 2023, 2022 and 2021 , respectively. 16. Earnings per Share The following table presents reconciliations for the numerators and denominators of basic and diluted earnings per share (“EPS”) during fiscal 2023, 2022 and 2021: Year Ended September 30, 2023 2022 2021 (In thousands, except per share data) Numerator for diluted and basic earnings per share: Net income $ 429,375 $ 373,541 $ 392,084 Denominator — share: Basic weighted-average shares 24,986 26,042 28,734 Effect of dilutive securities 381 305 526 Diluted weighted-average shares 25,367 26,347 29,260 Earnings per share: Basic $ 17.18 $ 14.34 $ 13.65 Diluted $ 16.93 $ 14.18 $ 13.40 The computation of diluted EPS excluded options to purchase approximately 14,000 , 32,000 , and 12,000 shares of common stock for fiscal 2023, 2022 and 2021, respectively, because the exercise prices of the options exceeded the average market price of our common stock in these fiscal years and their inclusion would be antidilutive. 17. Segment Information We are organized into two reportable segments: Scores and Software. Although we sell solutions and services into a large number of end user product and industry markets, our reportable business segments reflect the primary method in which management organizes and evaluates internal financial information to make operating decisions and assess performance. • 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, 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. 77 Table of Contents FAIR ISAAC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended September 30, 2023, 2022 and 2021 Our chief operating decision maker (“CODM”), who is our Chief Executive Officer, evaluates segment financial performance based on segment revenues and segment operating income. Segment operating expenses consist of direct and indirect costs principally related to personnel, facilities, 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. We have recast certain prior period amounts within this note to conform to the way we internally managed and monitored segment performance during the current fiscal year, reflecting immaterial movements of business activities between segments and changes in cost allocations. The following tables summarize segment information for fiscal 2023, 2022 and 2021: Year Ended September 30, 2023 Scores Software Unallocated Corporate Expenses Total (In thousands) Segment revenues: On-premises and SaaS software $ — $ 640,182 $ — $ 640,182 Professional services — 99,547 — 99,547 Scores 773,828 — — 773,828 Total segment revenues 773,828 739,729 — 1,513,557 Segment operating expense ( 92,757 ) ( 498,538 ) ( 156,426 ) ( 747,721 ) Segment operating income $ 681,071 $ 241,191 $ ( 156,426 ) $ 765,836 Unallocated share-based compensation expense ( 123,847 ) Unallocated amortization expense ( 1,100 ) Unallocated gain on product line asset sale 1,941 Operating income 642,830 Unallocated interest expense, net ( 95,546 ) Unallocated other income, net 6,340 Income before income taxes $ 553,624 Depreciation expense $ 485 $ 9,550 $ 71 $ 10,106 78 Table of Contents FAIR ISAAC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended September 30, 2023, 2022 and 2021 Year Ended September 30, 2022 Scores Software Unallocated Corporate Expenses Total (In thousands) Segment revenues: On-premises and SaaS software $ — $ 564,751 $ — $ 564,751 Professional services — 105,876 — 105,876 Scores 706,643 — — 706,643 Total segment revenues 706,643 670,627 — 1,377,270 Segment operating expense ( 87,288 ) ( 487,505 ) ( 142,647 ) ( 717,440 ) Segment operating income $ 619,355 $ 183,122 $ ( 142,647 ) 659,830 Unallocated share-based compensation expense ( 115,355 ) Unallocated amortization expense ( 2,061 ) Operating income 542,414 Unallocated interest expense, net ( 68,967 ) Unallocated other expense, net ( 2,138 ) Income before income taxes $ 471,309 Depreciation expense $ 723 $ 14,412 $ 107 $ 15,242 Year Ended September 30, 2021 Scores Software Unallocated Corporate Expenses Total (In thousands) Segment revenues: On-premises and SaaS software $ — $ 517,888 $ — $ 517,888 Professional services — 144,501 — 144,501 Scores 654,147 — — 654,147 Total segment revenues 654,147 662,389 — 1,316,536 Segment operating expense ( 90,538 ) ( 555,288 ) ( 141,691 ) ( 787,517 ) Segment operating income $ 563,609 $ 107,101 $ ( 141,691 ) 529,019 Unallocated share-based compensation expense ( 112,457 ) Unallocated amortization expense ( 3,255 ) Unallocated restructuring charges ( 7,957 ) Unallocated gains on product line asset sales and business divestiture 100,139 Operating income 505,489 Unallocated interest expense, net ( 40,092 ) Unallocated other income, net 7,745 Income before income taxes $ 473,142 Depreciation expense $ 667 $ 19,505 $ 147 $ 20,319 79 Table of Contents FAIR ISAAC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended September 30, 2023, 2022 and 2021 18. Leases We lease office space and data centers under operating lease arrangements, which constitute the majority of our lease obligations. For any lease with a lease term in excess of 12 months, the related lease assets and liabilities are recognized on our consolidated balance sheets as operating leases at the commencement of an agreement where it is determined that a lease exists. We have lease agreements that contain both lease and non-lease components, and we have elected to combine these components together and account for them as a single lease component for all classes of assets. Leases with a lease term of 12 months or less are not recorded on our consolidated balance sheets. Furthermore, we recognize lease expense for these leases on a straight-line basis over the lease term. Operating lease assets represent the right to use an underlying asset for the lease term and operating lease liabilities represent the obligation to make lease payments arising from the lease. These assets and liabilities are recognized based on the present value of future payments over the lease term at the commencement date. We use a collateralized incremental borrowing rate based on the information available at the commencement date, including the lease term, in determining the present value of future payments. In calculating the incremental borrowing rates, we consider recent ratings from credit agencies and current lease demographic information. Our operating leases also typically require payment of real estate taxes, common area maintenance, insurance and other operating costs as well as payments that are adjusted based on a consumer price index. These components comprise the majority of our variable lease cost and are excluded from the present value of our lease obligations. In instances where they are fixed, they are included due to our election to combine lease and non-lease components. Operating lease assets also include prepaid lease payments and initial direct costs, and are reduced by lease incentives. Our lease terms generally do not include options to extend or terminate the lease unless it is reasonably certain that the option will be exercised. Fixed payments may contain predetermined fixed rent escalations. We recognize the related rent expense on a straight-line basis from the commencement date to the end of the lease term. The following table presents the lease balances within the accompanying consolidated balance sheets as of September 30, 2023 and 2022: Balance Sheet Location September 30, 2023 2022 (In thousands) Assets Operating leases Operating lease right-of-use assets $ 25,703 $ 36,688 Liabilities Current operating leases Other accrued liabilities $ 16,336 $ 19,369 Non-current operating leases Operating lease liabilities 23,903 39,192 Total lease liabilities $ 40,239 $ 58,561 The components of our operating lease expenses were as follows: Year Ended September 30, 2023 2022 2021 (In thousands) Operating lease cost $ 16,594 $ 18,426 $ 19,551 Short-term lease cost 461 201 85 Variable lease cost 2,363 2,091 1,190 Sublease income ( 429 ) — — Total lease cost $ 18,989 $ 20,718 $ 20,826 The following table presents weighted-average remaining lease term and weighted-average discount rates related to our operating leases: 80 Table of Contents FAIR ISAAC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended September 30, 2023, 2022 and 2021 September 30, 2023 2022 Weighted-average remaining lease term (in months) 35 47 Weighted-average discount rate 4.58 % 4.01 % Supplemental cash flow information related to our operating leases was as follows: Year Ended September 30, 2023 2022 2021 (In thousands) Cash paid for amounts included in the measurement of lease liabilities $ 19,780 $ 22,021 $ 23,260 Lease assets obtained in exchange for new lease liabilities 4,150 7,505 5,413 Future lease payments under our non-cancellable operating leases as of September 30, 2023 were as follows: (In thousands) Fiscal 2024 $ 17,731 Fiscal 2025 11,872 Fiscal 2026 8,901 Fiscal 2027 3,949 Fiscal 2028 268 Thereafter 160 Total future undiscounted lease payments 42,881 Less imputed interest ( 2,642 ) Total reported lease liability $ 40,239 The amounts above do not include contractual sublease income totaling $ 1.1 million, $ 0.5 million, $ 0.4 million, and $ 0.2 million during fiscal 2024, 2025, 2026, and 2027, respectively. 19. Commitments In the ordinary course of business, we enter into contractual purchase obligations and other agreements that are legally binding and specify certain minimum payment terms. We are also a party to a management agreement with 19 of our executives providing for certain payments and other benefits in the event of a qualified change in control of FICO, coupled with a termination of the officer during the following year. 20. 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 a material exposure, either individually or in the aggregate. 81 Table of Contents FAIR ISAAC CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended September 30, 2023, 2022 and 2021 21. Guarantees In the ordinary course of business, we are not subject to potential obligations under guarantees , except for standard indemnification and warranty provisions that are contained within many of our customer license and service agreements and certain supplier agreements, including underwriter agreements, as well as standard indemnification agreements that we have executed with certain of our officers and directors, and give rise only to the disclosure in the consolidated financial statements. In addition, we continue to monitor the conditions that are subject to the guarantees and indemnifications to identify whether it is probable that a loss has occurred, and would recognize any such losses under the guarantees and indemnifications when those losses are estimable. Indemnification and warranty provisions contained within our customer license and service agreements and certain supplier agreements are generally consistent with those prevalent in our industry. The duration of our product warranties generally does not exceed 90 days following delivery of our products. We have not incurred significant obligations under customer indemnification or warranty provisions historically and do not expect to incur significant obligations in the future. Accordingly, we do not maintain accruals for potential customer indemnification or warranty-related obligations. The indemnification agreements that we have executed with certain of our officers and directors would require us to indemnify such officers and directors in certain instances. We have not incurred obligations under these indemnification agreements historically and do not expect to incur significant obligations in the future. Accordingly, we do not maintain accruals for potential officer or director indemnification obligations. The maximum potential amount of future payments that we could be required to make under the indemnification provisions in our customer license and service agreements, and officer and director agreements is unlimited. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Not applicable.