FICO(FICO) - 2020 Q4 - Annual Report

PART I Part I details FICO's core business of predictive analytics and decision management, its market segments, competitive landscape, and operational structure Item 1. Business FICO delivers predictive analytics and decision management systems, including the FICO® Score, across global industries through its Applications, Scores, and Decision Management Software segments General Business Overview FICO specializes in predictive analytics and decision management systems, including the FICO® Score, to automate and improve business decisions globally since 1956 - Fair Isaac Corporation (FICO) specializes in predictive analytics and decision management systems, including the FICO® Score, to automate and improve business decisions[15] - Founded in 1956, FICO assists companies in over 120 countries with customer acquisition, fraud reduction, credit loss mitigation, and market expansion[16] - FICO also offers online services for consumers to access and understand their FICO® Scores for financial health management[16] Products and Services FICO's solutions enhance customer engagement, reduce fraud, mitigate risks, and improve profitability through precise and agile decision-making - FICO's solutions primarily address customer engagement (acquisition, onboarding, servicing, protection) and non-customer decisions (transaction/claims processing), aiming for more precise, consistent, and agile decisions[19] - The company's offerings help clients reduce costs, mitigate risks and fraud, and increase revenues, profitability, and customer loyalty[19] Our Segments FICO operates through three segments: Applications for pre-configured solutions, Scores for credit risk assessment, and Decision Management Software for custom applications - FICO categorizes its products and services into three operating segments: Applications, Scores, and Decision Management Software[20][21][22] - Applications include pre-configured decision management solutions for specific business problems (e.g., marketing, fraud, collections), available as on-premises or SaaS[20] - Scores encompass business-to-business and business-to-consumer scoring solutions, including the FICO® Score, distributed through credit reporting agencies and direct services[21] - Decision Management Software provides analytic and decision management tools for clients to create custom applications, delivered as part of the FICO® Platform or on-premises/cloud[22] Our Solutions FICO's solutions leverage analytics, data management, software, and consulting to enable faster, more precise, and cost-effective business decisions - FICO's solutions are built on four fundamental disciplines: Analytics (predictive and optimization), Data management and transaction profiling, Software (decision management systems, customer engagement), and Consulting services[24][25][26] - All solutions aim to help businesses make faster, more precise, consistent, and agile decisions, while reducing costs and risks[26] Applications FICO develops industry-specific decision management applications for various sectors, including banking, insurance, and retail, covering fraud, customer management, and collections - FICO develops industry-tailored decision management applications for banking, insurance, telecommunications, healthcare, retail, and public sectors, expanding offerings on FICO® Analytic Cloud and AWS[27] Applications Segment Revenue Contribution (Fiscal 2018-2020) | Application Type | FY2020 (% of total revenues) | FY2019 (% of total revenues) | FY2018 (% of total revenues) | |:---------------------------|:-----------------------------|:-----------------------------|:-----------------------------| | Fraud Solutions | 15% | 18% | 17% | | Customer Communication Services | 8% | 9% | 10% | - Key application areas include Origination (e.g., FICO® Origination Manager, SBSS), Customer Management (e.g., FICO® TRIAD® Customer Manager, FICO® Strategy Director), Fraud Protection and Compliance (e.g., FICO® Falcon® Platform, Identity Proofing, AML solutions), Collections & Recovery (e.g., FICO® Debt Manager™), Customer Communication Services, and Marketing Applications[28][34][37][48][49][50] Scores FICO® Scores are widely used for credit risk assessment in the U.S., offering broad-based and industry-specific models, including those for financial inclusion - FICO® Scores are widely used in U.S. credit decisions by major banks, credit card organizations, mortgage lenders, and auto loan originators, providing a consistent and objective measure of credit risk[53] - The company offers various broad-based and industry-specific FICO® Scores, including those using alternative data (FICO® Score XD, UltraFICO™ Score) to expand the scorable population and promote financial inclusion[54] - FICO also provides FICO® Score-based products, education, and information directly to consumers through myFICO® service and licensed distribution partners[58][60] Decision Management Software FICO provides a platform for businesses to build custom, analytically-powered decision management applications, including tools for modeling, analytics, and optimization - FICO provides an analytics and decision management platform, the FICO® Decision Management Platform, for businesses to build tailored, analytically-powered decision management applications[61] - The FICO® Decision Management Suite, delivered as licensed software or SaaS, includes tools for authoring, customizing, executing, and managing predictive analytic, decisioning, and optimization components[62] - Key components include FICO® Decision Modeler, FICO® Analytics Workbench™, FICO® Decision Central™, and FICO® Xpress Optimization, enabling real-time decision execution and rapid application development[62][63][65][66][67] Competition FICO operates in a highly competitive and evolving market, facing diverse competitors from in-house developers to cloud solution providers - The market for FICO's advanced solutions is intensely competitive and constantly changing, with competitors varying in size and scope[69] - Competition comes from in-house developers, scoring model builders, ERP/CRM providers, business intelligence firms, credit report/score providers, data vendors, AI system builders, and cloud-based solution providers[69] - FICO believes its mix of products, predictive analytics expertise, and integration with decision management software provides a competitive advantage, though some competitors may hold larger shares in specific markets[71] Markets and Customers FICO serves a broad customer base across banking, insurance, retail, and public sectors, with major credit reporting agencies being key partners - FICO serves clients across multiple industries, primarily banking, insurance, retail, healthcare, and public agencies[81] - Key customers include 96 of the 100 largest U.S. financial institutions, two-thirds of the top 100 global banks, over 600 insurers, more than 300 retailers, and over 200 government/public agencies[81] Revenue from Major Credit Reporting Agencies (Fiscal 2018-2020) | Partner | FY2020 (% of total revenues) | FY2019 (% of total revenues) | FY2018 (% of total revenues) | |:--------|:-----------------------------|:-----------------------------|:-----------------------------| | Experian, TransUnion, Equifax (collectively) | 32% | 29% | 25% | Technology FICO focuses on analytics software and decision management technologies, enhancing its platform and expanding SaaS offerings on cloud infrastructure - FICO specializes in analytics software and decision management technologies, maintaining active research to derive greater insight and predictive value from data[88] - In fiscal 2020, FICO enhanced its FICO® Decision Management Platform with new Platform Service functionality for cross-application enablement of centralized services[90] - The company is expanding the integration of its software solutions into SaaS offerings hosted on the FICO® Analytic Cloud and AWS, driven by core technical capabilities and open-source software partnerships[91] Product Protection and Trademarks FICO protects its intellectual property through patents, copyrights, trademarks, and trade secrets, while acknowledging risks of infringement - FICO protects its proprietary rights through a combination of patent, copyright, trademark, trade secret laws, and confidentiality agreements[103][104] - The company holds 184 U.S. and 16 foreign patents with 102 applications pending, and 34 registered trademarks in the U.S. and select foreign countries[105][108] - Despite protections, FICO acknowledges risks of competitors copying software or obtaining trade secrets, especially in countries with weaker intellectual property laws[106] Personnel As of September 30, 2020, FICO employed 4,003 individuals globally, with no collective bargaining agreements or work stoppages - As of September 30, 2020, FICO employed 4,003 persons worldwide, with significant employee bases in India and the United Kingdom[110] - None of FICO's employees are covered by a collective bargaining agreement, except where mandated by foreign law, and no work stoppages occurred in fiscal 2020[110] Item 1A. Risk Factors FICO faces significant risks from the COVID-19 pandemic, strategic execution, product reliance, intense competition, operational disruptions, global instability, regulatory changes, and financial volatility - The COVID-19 pandemic has negatively affected FICO's operations and customer spending, leading to reduced lending activities and potential delays or cancellations of purchasing decisions[113][116] - FICO's growth prospects depend on the success of its cloud-enabled, platform-based Decision Management strategy, with risks including market unreceptiveness to cloud offerings or multiple product purchases[117] - A substantial portion of FICO's revenues (86% in FY2020) is derived from the banking industry and a few key products (scoring, fraud, customer communication, customer management, decision management software), making the company vulnerable to industry downturns or market acceptance issues[118][122] Business, Market and Strategy Risks FICO faces risks from the COVID-19 pandemic, its Decision Management strategy, reliance on key products and industries, and challenges in product development and acquisitions - The COVID-19 pandemic has disrupted FICO's operations, led to office closures, workforce reductions, and may adversely affect future revenues due to reduced customer spending and lending activities[115][116] - FICO's Decision Management strategy, focused on cloud-native platforms and multiple product sales, faces risks if the market is unreceptive or if revenue recognition shifts cause volatility[117] - The company relies heavily on scoring solutions, fraud solutions, customer communication services, customer management solutions, and decision management software, with 86% of FY2020 revenues from the banking industry[118][122] - Failure to develop successful new products, keep pace with rapidly changing technologies, or maintain competitive pricing strategies could harm FICO's business and market share[131][135][138] - Acquisitions and divestitures carry significant risks, including business disruption, integration difficulties, failure to realize strategic goals, and potential financial liabilities[145][147] Operational Risks FICO is exposed to operational risks including cybersecurity threats, IT system failures, challenges in talent acquisition and retention, and data availability issues - FICO is a frequent target of cybersecurity threats due to storing sensitive consumer and customer information, with breaches potentially leading to significant litigation, regulatory fines, and reputational damage[153][156] - Business interruptions or failures of information technology and communication systems, including those of external service providers, could disrupt product availability and harm FICO's reputation and financial condition[158][159] - The company's future success depends on its ability to recruit and retain qualified personnel, especially in technical, sales, and consulting roles, in a highly competitive labor market[161] - FICO's business relies on obtaining sufficient, current, and statistically relevant data from customers and partners; failure to maintain these relationships or increased data restrictions could impair product effectiveness[163] Global Operational Risks FICO's international operations are subject to global economic downturns, political instability, foreign regulations, and currency fluctuations, including Brexit impacts - Material adverse developments in global economic conditions, such as the COVID-19 pandemic, can reduce demand for FICO's products and services, leading to decreased capital expenditures by customers and increased price competition[165][166] - FICO's international operations (32% of FY2020 revenues) expose it to additional risks, including economic and political instability, foreign laws and regulations, data privacy concerns, longer payment cycles, and currency fluctuations[171] - Brexit poses risks to FICO's U.K. business, potentially affecting labor and goods flow, customer/supplier relationships, and causing market volatility[167] Legal, Regulatory and Compliance Risks FICO faces legal and regulatory risks from data privacy laws, fair lending regulations, and potential intellectual property infringement claims - FICO is subject to various U.S. and international laws and regulations, including those related to data use by creditors (Fair Credit Reporting Act), fair lending, data privacy (GDPR, CCPA), and anti-money laundering[175][177][178][179] - Changes in these laws or their interpretation could expose FICO to liability, increase expenses, limit market competitiveness, or render products obsolete[174][181] - The company faces risks from intellectual property infringement claims, which could result in significant defense costs, damages, or the need to cease product use or license technology[182][183] Financial Risks FICO's financial performance is subject to long sales cycles, difficulties in revenue forecasting, and potential adverse impacts from acquisition-related charges - FICO's long and variable sales cycles (60 days to 18 months) make accurate revenue forecasting difficult, potentially leading to fluctuations in financial results and stock price volatility[184][185] - A significant portion of customer agreements are finalized in the final weeks of a quarter, increasing the risk of discrepancies between forecasted and actual results[186] - Acquisition-related charges, such as goodwill impairment, amortization of intangibles, and integration costs, can adversely affect FICO's operating results and cash flows[189][190] General Risk Factors FICO's stock price is volatile, influenced by operating results and market expectations, and the company faces risks from anti-takeover defenses and tax law changes - FICO's stock price is volatile and can fluctuate due to variations in revenues, operating results, market analyst expectations, product performance issues, and economic conditions[192] - Anti-takeover defenses, such as the ability to issue preferred stock, could limit demand for FICO's securities or the price investors are willing to pay[195] - Changes in tax laws or adverse outcomes from income tax return examinations could negatively impact FICO's results of operations[196][197] Item 1B. Unresolved Staff Comments There are no unresolved staff comments applicable to the company Item 2. Properties FICO operates from leased office and data center facilities globally, including its corporate headquarters in San Jose, California - FICO's properties are primarily leased office facilities for sales, data processing, research and development, consulting, and administrative personnel[199] - Principal locations include San Jose, CA (55,000 sq ft, corporate HQ), Bangalore, India (173,000 sq ft), San Rafael, CA (124,000 sq ft), San Diego, CA (80,000 sq ft), and Roseville, MN (45,000 sq ft)[199] - The company also leases approximately 235,000 square feet of office and data center space in other domestic and international locations (UK, China, Singapore)[199] Item 3. Legal Proceedings FICO is cooperating with a U.S. Department of Justice civil investigation initiated in March 2020 regarding potential exclusionary conduct - On March 13, 2020, FICO received a letter from the Antitrust Division of the U.S. Department of Justice (DOJ) informing them of a civil investigation into potential exclusionary conduct[201] - FICO is cooperating with the DOJ in its investigation[201] Item 4. Mine Safety Disclosures Mine Safety Disclosures are not applicable to FICO PART II Part II covers FICO's common equity market, stockholder matters, equity repurchases, selected financial data, and management's discussion and analysis Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities FICO's common stock trades on the NYSE, with 278 stockholders of record as of October 30, 2020, and the company actively repurchases its shares under a $250 million program - FICO's common stock trades on the New York Stock Exchange under the symbol: FICO[205] - As of October 30, 2020, there were 278 stockholders of record[205] Market Information FICO's common stock is traded on the NYSE under the symbol FICO, with 278 stockholders of record as of October 30, 2020 - FICO's common stock is traded on the New York Stock Exchange under the symbol FICO[205] - As of October 30, 2020, there were 278 stockholders of record[205] Unregistered Sales of Equity Securities and Use of Proceeds This section is not applicable, indicating no unregistered sales of equity securities or use of proceeds to report - This section is not applicable, indicating no unregistered sales of equity securities or use of proceeds to report[206] Issuer Purchases of Equity Securities FICO actively repurchased common stock in Q3 FY2020, with a new $250 million program approved in July 2020, and $224.8 million remaining Issuer Purchases of Equity Securities (Q3 FY2020) | Period (2020) | Total Shares Purchased | Average Price Paid per Share | Shares Purchased as Part of Announced Plans or Programs | Amount that May Yet Be Purchased Under Plans or Programs | |:---------------------------|:-----------------------|:-----------------------------|:--------------------------------------------------------|:---------------------------------------------------------| | July 1 - July 31 | 2,298 | $436.71 | — | $250,000,000 | | August 1 - August 31 | 27,880 | $426.55 | 24,000 | $239,776,878 | | September 1 - September 30 | 35,990 | $421.32 | 35,600 | $224,777,076 | | Total | 66,168 | $424.05 | 59,600 | $224,777,076 | - The total number of shares purchased includes 6,568 shares delivered in satisfaction of tax withholding obligations from restricted stock unit vesting[208] - A new open-ended stock repurchase program, authorizing up to $250.0 million, was approved in July 2020, with $224.8 million remaining as of September 30, 2020[208] Performance Graph The performance graph illustrates the cumulative total stockholder return of FICO common stock against market indices from 2015 to 2020 - The performance graph illustrates the cumulative total stockholder return of a $100 investment in FICO common stock, the S&P 500, and the S&P Application Software Index from September 30, 2015, to September 30, 2020, with dividends reinvested[209][213] - Past performance is not indicative of future performance[209] Item 6. Selected Financial Data FICO's selected financial data for fiscal years 2016-2020 demonstrates consistent growth in revenues, net income, and EPS, with working capital turning positive in 2020 Selected Financial Data (Fiscal Years 2016-2020) | Metric (In thousands, except per share data) | 2020 | 2019 | 2018 | 2017 | 2016 | |:---------------------------------------------|:------------|:------------|:------------|:------------|:------------| | Revenues | $1,294,562 | $1,160,083 | $1,000,146 | $934,983 | $881,356 | | Operating income | $295,969 | $253,548 | $175,359 | $182,159 | $169,592 | | Net income | $236,411 | $192,124 | $126,482 | $133,414 | $109,448 | | Basic earnings per share | $8.13 | $6.63 | $4.26 | $4.32 | $3.52 | | Diluted earnings per share | $7.90 | $6.34 | $4.06 | $4.14 | $3.39 | | Dividends declared per share | — | — | — | $0.04 | $0.08 | Selected Balance Sheet Data (Fiscal Years 2016-2020) | Metric (In thousands) | 2020 | 2019 | 2018 | 2017 | 2016 | |:----------------------|:------------|:------------|:------------|:------------|:------------| | Working capital | $119,567 | $(35,122) | $(77,514) | $22,842 | $21,561 | | Total assets | $1,606,240 | $1,433,448 | $1,330,467 | $1,348,728 | $1,220,676 | | Senior notes | $750,000 | $485,000 | $513,000 | $244,000 | $316,000 | | Revolving line of credit | $95,000 | $345,000 | $257,000 | $361,000 | $255,000 | | Stockholders' equity | $331,082 | $289,767 | $287,437 | $466,183 | $446,828 | - Fiscal years 2020 and 2017 included pre-tax charges of $45.0 million and $4.5 million, respectively, in restructuring and impairment charges[217] Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations FICO's MD&A details its cloud-enabled strategy, driving fiscal 2020 revenue growth to $1.29 billion and net income to $236.4 million, alongside cost initiatives and revenue recognition shifts - FICO's strategy in fiscal 2020 focused on advancing its cloud-enabled, platform-based approach in Applications and Decision Management Software segments, leading to increased cloud bookings (41% of total bookings in FY2020 vs. 39% in FY2019)[221] - Total revenues for fiscal 2020 increased by 12% to $1.29 billion, and net income increased by 23% to $236.4 million, with diluted EPS rising 25% to $7.90[227][228] - The Scores segment was a primary growth driver, with revenue increasing 25% to $528.5 million and operating income increasing 26% to $454.3 million in fiscal 2020[227] - In fiscal 2020, FICO implemented a strategic cost initiative, incurring $41.9 million in charges for office space impairment and workforce reduction, expecting $36 million in annual expense savings from fiscal 2021[224] Business Overview FICO's fiscal 2020 strategy focused on cloud-enabled, platform-based solutions, driving increased cloud bookings and Scores segment expansion, despite COVID-19 impacts - FICO's strategy in fiscal 2020 focused on cloud-enabled, platform-based solutions, increasing cloud bookings to 41% of total bookings[221] - The Scores segment saw multi-year expansion in the U.S. business-to-consumer market and launched the FICO® Resilience Index to complement FICO® Score models[222] - Total revenues for fiscal 2020 were $1.29 billion (up 12% YoY), with Scores revenue up 25% to $528.5 million and SaaS business revenue up 11% to $300.0 million[227] - FICO repurchased approximately 0.7 million shares for $235.2 million in fiscal 2020, with $224.8 million remaining under the current stock repurchase program[223] - A strategic cost initiative in fiscal 2020 resulted in a $41.9 million charge for office space impairment and workforce reduction, aiming for $36 million in annual savings[224] - The company is transitioning from separate license and maintenance components to a single software subscription contract, which will shift revenue recognition timing but not negatively impact cash flows[225] Results of Operations FICO's fiscal 2020 results show a 12% revenue increase to $1.29 billion and a 23% net income increase to $236.4 million, driven by Scores and Decision Management Software segments Total Revenues by Segment (Fiscal 2018-2020) | Segment | 2020 ($ thousands) | 2019 ($ thousands) | 2018 ($ thousands) | 2020 to 2019 Change ($ thousands) | 2019 to 2018 Change ($ thousands) | 2020 to 2019 Percentage Change | 2019 to 2018 Percentage Change | |:-----------------------------|:-------------------|:-------------------|:-------------------|:----------------------------------|:----------------------------------|:-------------------------------|:-------------------------------| | Applications | 602,046 | 605,034 | 564,375 | (2,988) | 40,659 | — % | 7% | | Scores | 528,547 | 421,177 | 335,870 | 107,370 | 85,307 | 25 % | 25% | | Decision Management Software | 163,969 | 133,872 | 99,901 | 30,097 | 33,971 | 22 % | 34% | | Total | 1,294,562 | 1,160,083 | 1,000,146 | 134,479 | 159,937 | 12 % | 16% | Segment Revenue Contribution (Fiscal 2018-2020) | Segment | 2020 | 2019 | 2018 | |:-----------------------------|:------|:------|:------|\ | Applications | 46% | 52% | 56% | | Scores | 41% | 36% | 34% | | Decision Management Software | 13% | 12% | 10% | | Total | 100% | 100% | 100% | Consolidated Operating Expenses and Other Income, Net (Fiscal 2018-2020) | Metric (In thousands) | 2020 | 2019 | 2018 | 2020 to 2019 Change | 2019 to 2018 Change | 2020 to 2019 % Change | 2019 to 2018 % Change | |:--------------------------------------|:------------|:------------|:------------|:--------------------|:--------------------|:----------------------|:----------------------| | Revenues | $1,294,562 | $1,160,083 | $1,000,146 | $134,479 | $159,937 | 12 % | 16 % | | Cost of revenues | 361,142 | 336,845 | 312,898 | 24,297 | 23,947 | 7 % | 8 % | | Research and development | 166,499 | 149,478 | 128,383 | 17,021 | 21,095 | 11 % | 16 % | | Selling, general and administrative | 420,930 | 414,086 | 376,912 | 6,844 | 37,174 | 2 % | 10 % | | Amortization of intangible assets | 4,993 | 6,126 | 6,594 | (1,133) | (468) | (18)% | (7)% | | Restructuring and impairment charges | 45,029 | — | — | 45,029 | — | — % | — % | | Total operating expenses | 998,593 | 906,535 | 824,787 | 92,058 | 81,748 | 10 % | 10 % | | Operating income | 295,969 | 253,548 | 175,359 | 42,421 | 78,189 | 17 % | 45 % | | Interest expense, net | (42,177) | (39,752) | (31,311) | (2,425) | (8,441) | 6 % | 27 % | | Other income, net | 3,208 | 2,276 | 12,884 | 932 | (10,608) | 41 % | (82)% | | Income before income taxes | 257,000 | 216,072 | 156,932 | 40,928 | 59,140 | 19 % | 38 % | | Provision for income taxes | 20,589 | 23,948 | 30,450 | (3,359) | (6,502) | (14)% | (21)% | | Net income | $236,411 | $192,124 | $126,482 | $44,287 | $65,642 | 23 % | 52 % | Capital Resources and Liquidity FICO maintains strong liquidity with $157.4 million in cash and available credit, funding operations and stock repurchases, while managing $750.0 million in Senior Notes - As of September 30, 2020, FICO had $157.4 million in cash and cash equivalents, including $118.0 million held by foreign subsidiaries, which are deemed permanently reinvested[297] - The company believes its cash, available borrowings from its $400 million revolving line of credit, and anticipated operating cash flows are sufficient to fund future capital requirements[297] Summary of Cash Flows (Fiscal 2018-2020) | Cash Flow Activity (In thousands) | 2020 | 2019 | 2018 | |:----------------------------------|:------------|:------------|:------------| | Operating activities | $364,916 | $260,350 | $223,052 | | Investing activities | $(24,583) | $(42,760) | $(14,119) | | Financing activities | $(289,424) | $(200,047) | $(218,627) | | Effect of exchange rate changes | 59 | (1,140) | (5,901) | | Increase (decrease) in cash | $50,968 | $16,403 | $(15,595) | - Net cash provided by operating activities increased by $104.5 million in fiscal 2020 to $364.9 million, driven by higher net income and non-cash items like impairment losses[301] - FICO repurchased $235.2 million of common stock in fiscal 2020 under its stock repurchase programs[305] - The company has a $400 million unsecured revolving line of credit maturing in May 2023, with $95.0 million outstanding at September 30, 2020[306] - FICO's Senior Notes totaled $750.0 million in carrying value as of September 30, 2020, including 2018 Senior Notes ($400M, 5.25% due 2026) and 2019 Senior Notes ($350M, 4.00% due 2028)[307][308] Critical Accounting Policies and Estimates FICO's critical accounting policies involve significant judgments in revenue recognition, goodwill impairment, share-based compensation, income taxes, and lease accounting - FICO's critical accounting policies involve significant judgments and assumptions in revenue recognition, goodwill and other intangible assets, share-based compensation, income taxes, and contingencies[313][314] - Revenue recognition requires evaluating distinct performance obligations, estimating variable consideration, and determining standalone selling prices (SSPs) for bundled products and services[315][321][322] - Goodwill and intangible assets are assessed for impairment annually, using qualitative or quantitative methods, with no impairment recognized in fiscal 2018-2020[331][332][334] - The company adopted Topic 842 (Leases) in fiscal 2020, recognizing operating lease assets and liabilities on the balance sheet, with an immaterial impact on income and cash flows[342][343][344] Item 7A. Quantitative and Qualitative Disclosures About Market Risk FICO manages market risks from interest rate fluctuations on its investment portfolio and variable-rate debt, and foreign exchange rate volatility through forward contracts - FICO is exposed to market risk related to changes in interest rates and foreign exchange rates, but does not use derivative financial instruments for speculative purposes[347] Investments with Interest Rate Risk (September 30, 2020 & 2019) | Metric (Dollars in thousands) | Sep 30, 2020 Cost Basis | Sep 30, 2020 Carrying Amount | Sep 30, 2020 Average Yield | Sep 30, 2019 Cost Basis | Sep 30, 2019 Carrying Amount | Sep 30, 2019 Average Yield | |:------------------------------|:------------------------|:-----------------------------|:---------------------------|:------------------------|:-----------------------------|:---------------------------| | Cash and cash equivalents | $157,394 | $157,394 | 0.05% | $106,426 | $106,426 | 0.76% | Senior Notes Carrying Amounts and Fair Values (September 30, 2020 & 2019) | Senior Notes (In thousands) | Sep 30, 2020 Face Value | Sep 30, 2020 Fair Value | Sep 30, 2019 Face Value | Sep 30, 2019 Fair Value | |:----------------------------|:------------------------|:------------------------|:------------------------|:------------------------| | The 2010 Senior Notes | — | — | $85,000 | $86,121 | | The 2018 Senior Notes | 400,000 | 442,000 | 400,000 | 428,000 | | The 2019 Senior Notes | 350,000 | 358,750 | — | — | | Total | $750,000 | $800,750 | $485,000 | $514,121 | - FICO uses foreign currency forward contracts to manage risks from fluctuations in foreign exchange rates, primarily for British pound, Euro, and Singapore dollar exposures, with contracts typically maturing in less than three months[351][352] Market Risk Disclosures FICO's market risk disclosures detail exposure to interest rate changes on investments and debt, and foreign exchange rate volatility managed by forward contracts - FICO's investment portfolio, consisting of bank deposits and money market funds, is subject to interest rate risk, but significant impact on operating results or cash flows from sudden changes is not expected[349] - The company's $400 million unsecured revolving line of credit has variable interest rates, impacting interest incurred and cash flows[350] - FICO utilizes foreign currency forward contracts to protect foreign-currency-denominated receivable and cash balances from exchange rate volatility, primarily for British pound, Euro, and Singapore dollar[351] Item 8. Financial Statements and Supplementary Data This section presents FICO's audited consolidated financial statements for fiscal years 2018-2020, with unqualified auditor opinions and detailed notes on accounting policies and critical audit matters - Deloitte & Touche LLP provided unqualified opinions on FICO's consolidated financial statements and the effectiveness of its internal control over financial reporting as of September 30, 2020[358] - A critical audit matter was identified regarding revenue recognition due to the complexity of contracts, judgment in identifying performance obligations, estimating variable consideration, and determining standalone selling prices (SSPs)[372] Consolidated Balance Sheets (September 30, 2020 & 2019) | Asset/Liability (In thousands) | 2020 | 2019 | |:-------------------------------|:------------|:------------| | Assets: | | | | Cash and cash equivalents | $157,394 | $106,426 | | Accounts receivable, net | 334,180 | 297,427 | | Total current assets | 534,078 | 455,706 | | Total assets | $1,606,240 | $1,433,448 | | Liabilities: | | | | Total current liabilities | 414,511 | 490,828 | | Long-term debt | 739,435 | 606,790 | | Total liabilities | 1,275,158 | 1,143,681 | | Stockholders' Equity: | | | | Total stockholders' equity | 331,082 | 289,767 | Consolidated Statements of Income and Comprehensive Income (Fiscal 2018-2020) | Revenue/Expense (In thousands, except per share data) | 2020 | 2019 | 2018 | |:------------------------------------------------------|:------------|:------------|:------------| | Total revenues | $1,294,562 | $1,160,083 | $1,000,146 | | Total operating expenses | 998,593 | 906,535 | 824,787 | | Operating income | 295,969 | 253,548 | 175,359 | | Net income | 236,411 | 192,124 | 126,482 | | Diluted earnings per share | $7.90 | $6.34 | $4.06 | Consolidated Statements of Cash Flows (Fiscal 2018-2020) | Cash Flow Activity (In thousands) | 2020 | 2019 | 2018 | |:----------------------------------|:------------|:------------|:------------| | Net cash provided by operating activities | $364,916 | $260,350 | $223,052 | | Net cash used in investing activities | $(24,583) | $(42,760) | $(14,119) | | Net cash used in financing activities | $(289,424) | $(200,047) | $(218,627) | | Cash and cash equivalents, end of year | $157,394 | $106,426 | $90,023 | Report of Independent Registered Public Accounting Firm Deloitte & Touche LLP issued unqualified opinions on FICO's consolidated financial statements and internal control over financial reporting for fiscal 2020 - Deloitte & Touche LLP issued unqualified opinions on FICO's consolidated financial statements for the period ended September 30, 2020, and on the effectiveness of its internal control over financial reporting[358] Change in Accounting Principle FICO adopted the new lease standard (Topic 842) in fiscal 2020 using a modified retrospective approach, impacting balance sheet recognition of leases - FICO changed its method of accounting for leases in fiscal year 2020 due to the adoption of the new lease standard (Topic 842) using the modified retrospective approach, meaning prior periods were not restated[359] Basis for Opinions The auditor's opinions are based on audits conducted under PCAOB standards, with management responsible for financial statements and internal controls - Management is responsible for financial statements and internal control, while the auditor's responsibility is to express an opinion based on audits conducted in accordance with PCAOB standards[360][361] Definition and Limitations of Internal Control over Financial Reporting Internal control over financial reporting aims for reasonable assurance regarding financial reliability, but inherently has limitations that may prevent misstatement detection - Internal control over financial reporting is a process designed to provide reasonable assurance regarding financial reporting reliability and asset safeguarding[363][365] - Internal controls have inherent limitations and may not prevent or detect all misstatements, and their effectiveness can deteriorate over time[366] Critical Audit Matter Revenue recognition was identified as a critical audit matter due to complex contracts requiring significant judgment in performance obligations and pricing - Revenue recognition was identified as a critical audit matter due to the complexity of FICO's contracts, involving significant judgment in identifying performance obligations, estimating variable consideration, and determining standalone selling prices (SSPs)[372] How the Critical Audit Matter Was Addressed in the Audit Audit procedures addressed revenue recognition by testing controls, sampling contracts, and assessing management's judgments on performance obligations and pricing - Audit procedures included testing controls over contract revenue, sampling contracts to evaluate management's conclusions on performance obligations and variable consideration, and assessing the accuracy of SSP determination[373][374][375][376][377][378] Consolidated Balance Sheets The consolidated balance sheets present FICO's financial position as of September 30, 2020 and 2019, detailing assets, liabilities, and stockholders' equity Consolidated Balance Sheets (September 30, 2020 & 2019) | Asset/Liability (In thousands) | 2020 | 2019 | |:-------------------------------|:------------|:------------| | Assets: | | | | Cash and cash equivalents | $157,394 | $106,426 | | Accounts receivable, net | 334,180 | 297,427 | | Prepaid expenses and other current assets | 42,504 | 51,853 | | Total current assets | 534,078 | 455,706 | | Marketable securities | 25,513 | 20,222 | | Property and equipment, net | 46,419 | 53,027 | | Operating lease right-of-use assets | 57,656 | — | | Goodwill | 812,364 | 803,542 | | Intangible assets, net | 9,236 | 14,139 | | Deferred income taxes | 14,629 | 6,006 | | Other assets | 105,285 | 79,163 | | Total assets | $1,606,240 | $1,433,448 | | Liabilities and Stockholders' Equity: | | | | Accounts payable | $23,033 | $23,118 | | Accrued compensation and employee benefits | 117,952 | 106,240 | | Other accrued liabilities | 63,367 | 32,454 | | Deferred revenue | 115,159 | 111,016 | | Current maturities on debt | 95,000 | 218,000 | | Total current liabilities | 414,511 | 490,828 | | Long-term debt | 739,435 | 606,790 | | Operating lease liabilities | 73,207 | — | | Other liabilities | 48,005 | 46,063 | | Total liabilities | 1,275,158 | 1,143,681 | | Common stock | 291 | 289 | | Paid-in-capital | 1,218,583 | 1,225,365 | | Treasury stock, at cost | (2,997,856) | (2,802,450) | | Retained earnings | 2,193,059 | 1,956,648 | | Accumulated other comprehensive loss | (82,995) | (90,085) | | Total stockholders' equity | 331,082 | 289,767 | | Total liabilities and stockholders' equity | $1,606,240 | $1,433,448 | Consolidated Statements of Income and Comprehensive Income The consolidated statements of income and comprehensive income detail FICO's revenues, expenses, and net income for fiscal years 2018-2020 Consolidated Statements of Income and Comprehensive Income (Fiscal 2018-2020) | Revenue/Expense (In thousands, except per share data) | 2020 | 2019 | 2018 | |:------------------------------------------------------|:------------|:------------|:------------| | Revenues: | | | | | Transactional and maintenance | $973,933 | $860,948 | $750,603 | | Professional services | 183,040 | 184,095 | 176,910 | | License | 137,589 | 115,040 | 72,633 | | Total revenues | $1,294,562 | $1,160,083 | $1,000,146 | | Operating expenses: | | | | | Cost of revenues | 361,142 | 336,845 | 312,898 | | Research and development | 166,499 | 149,478 | 128,383 | | Selling, general and administrative | 420,930 | 414,086 | 376,912 | | Amortization of intangible assets | 4,993 | 6,126 | 6,594 | | Restructuring and impairment charges | 45,029 | — | — | | Total operating expenses | 998,593 | 906,535 | 824,787 | | Operating income | 295,969 | 253,548 | 175,359 | | Interest expense, net | (42,177) | (39,752) | (31,311) | | Other income, net | 3,208 | 2,276 | 12,884 | | Income before income taxes | 257,000 | 216,072 | 156,932 | | Provision for income taxes | 20,589 | 23,948 | 30,450 | | Net income | $236,411 | $192,124 | $126,482 | | Other comprehensive income (loss): | | | | | Foreign currency translation adjustments | 7,090 | (13,664) | (9,926) | | Comprehensive income | $243,501 | $178,460 | $116,556 | | Basic earnings per share | $8.13 | $6.63 | $4.26 | | Diluted earnings per share | $7.90 | $6.34 | $4.06 | Consolidated Statements of Stockholders' Equity The consolidated statements of stockholders' equity track changes in equity components, including net income and stock repurchases, for fiscal years 2018-2020 Consolidated Statements of Stockholders' Equity (Fiscal 2018-2020) | (In thousands) | Sep 30, 2017 | Sep 30, 2018 | Sep 30, 2019 | Sep 30, 2020 | |:---------------------------------------------|:-------------|:-------------|:-------------|:-------------| | Total Stockholders' Equity, beginning balance | $466,183 | $287,437 | $289,767 | $289,767 | | Share-based compensation | 74,814 | 82,973 | 93,681 | 93,681 | | Issuance of treasury stock | (33,181) | (30,209) | (60,644) | (60,644) | | Repurchases of common stock | (336,935) | (228,894) | (235,223) | (235,223) | | Net income | 126,482 | 192,124 | 236,411 | 236,411 | | Foreign currency translation adjustments | (9,926) | (13,664) | 7,090 | 7,090 | | Total Stockholders' Equity, ending balance | $287,437 | $289,767 | $331,082 | $331,082 | Consolidated Statements of Cash Flows The consolidated statements of cash flows present FICO's cash generation and usage from operating, investing, and financing activities for fiscal years 2018-2020 Consolidated Statements of Cash Flows (Fiscal 2018-2020) | Cash Flow Activity (In thousands) | 2020 | 2019 | 2018 | |:----------------------------------|:------------|:------------|:------------| | Cash flows from operating activities: | | | | | Net income | $236,411 | $192,124 | $126,482 | | Depreciation and amortization | 30,367 | 31,612 | 30,182 | | Share-based compensation | 93,681 | 82,973 | 74,814 | | Deferred income taxes | (8,639) | 7,701 | 10,584 | | Non-cash operating lease costs | 20,011 | — | — | | Impairment loss on operating lease assets | 28,016 | — | — | | Net cash provided by operating activities | $364,916 | $260,350 | $223,052 | | Cash flows from investing activities: | | | | | Purchases of property and equipment | (21,989) | (23,981) | (31,299) | | Cash paid for acquisitions, net of cash acquired | — | (15,855) | — | | Net cash used in investing activities | $(24,583) | $(42,760) | $(14,119) | | Cash flows from financing activities: | | | | | Proceeds from revolving line of credit | 263,000 | 229,000 | 427,000 | | Payments on revolving line of credit | (513,000) | (141,000) | (531,000) | | Proceeds from issuance of senior notes | 350,000 | — | 400,000 | | Payments on senior notes | (85,000) | (28,000) | (131,000) | | Repurchases of common stock | (235,223) | (228,894) | (342,596) | | Net cash used in financing activities | $(289,424) | $(200,047) | $(218,627) | | Cash and cash equivalents, end of year | $157,394 | $106,426 | $90,023 | Notes to Consolidated Financial Statements The notes provide detailed disclosures on FICO's accounting policies, segment information, lease adoption, restructuring charges, and revenue recognition complexities - FICO's financial statements are prepared in conformity with U.S. GAAP, requiring significant management estimates and assumptions, particularly for revenue recognition, goodwill, share-based compensation, and income taxes[313][399] - The company adopted Topic 842 (Leases) in fiscal 2020, recognizing operating lease assets and liabilities of $89.8 million and $98.9 million, respectively, with an immaterial impact on income and cash flows[450] - FICO's revenue is primarily from term-based/perpetual software and scoring licenses, SaaS subscriptions, and professional services, with revenue recognized when control of goods/services is transferred[315][417] - Goodwill and intangible assets are assessed for impairment annually, with no impairment losses recognized in fiscal 2018-2020[413][416] - FICO incurred $45.0 million in restructuring and impairment charges in fiscal 2020, related to office space consolidation and workforce reduction, eliminating 209 positions[483] - The effective tax rates were 8.0%, 11.1%, and 19.4% in fiscal 2020, 2019, and 2018, respectively, with the 2020 decrease due to excess tax benefits from stock-based compensation[276][492] - FICO's Scores segment operating income increased by $93.0 million in fiscal 2020, driven by a $107.4 million revenue increase, while Applications segment operating income decreased by $7.6 million[286][287][288] - Revenue from Experian, TransUnion, and Equifax collectively accounted for 32%, 29%, and 25% of total revenues in fiscal 2020, 2019, and 2018, respectively[529] - As of September 30, 2020, FICO had $298.0 million in remaining performance obligations, with approximately 50% expected to be recognized over the next 18 months[538] - In October 2020, FICO entered a five-year agreement with Rackspace US, Inc. for primary cloud infrastructure services, replacing direct AWS services, with a minimum purchase obligation of $120 million over the first three years[556] PART III Part III outlines FICO's directors, executive officers, corporate governance, executive compensation, security ownership, related transactions, and principal accountant fees Item 10. Directors, Executive Officers and Corporate Governance This section details FICO's directors, executive officers, and corporate governance practices, including codes of ethics, with further information referenced from the 2021 Proxy Statement - Information regarding FICO's Directors is incorporated by reference from the 2021 Proxy Statement[566] - Key executive officers include William J. Lansing (CEO), Michael I. McLaughlin (EVP, CFO), Thomas A. Bowers (EVP, Corporate Strategy), Stephanie Covert (EVP, Sales & Marketing), Richard S. Deal (EVP, Chief Human Resources Officer), Michael S. Leonard (VP, Chief Accounting Officer), Claus Moldt (EVP, CTO), Mark R. Scadina (EVP, General Counsel), and James M. Wehmann (EVP, Scores)[568] - FICO has adopted a Code of Ethics for Senior Financial Management and a Code of Conduct and Business Ethics, available on its website, www.fico.com[571](index=571&type=chunk) Item 11. Executive Compensation Information on executive compensation for fiscal 2020 is incorporated by reference from FICO's 2021 Proxy Statement - Information regarding executive compensation is incorporated by reference from the 'Director Compensation for Fiscal 2020' and 'Executive Compensation' sections of FICO's 2021 Proxy Statement[573] Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Details on security ownership of beneficial owners and management, along with related stockholder matters, are incorporated by reference from FICO's 2021 Proxy Statement - Information on security ownership of certain beneficial owners and management, and related stockholder matters, is incorporated by reference from FICO's 2021 Proxy Statement[574] Item 13. Certain Relationships and Related Transactions, and Director Independence Information regarding certain relationships, related person transactions, and director independence is incorporated by reference from FICO's 2021 Proxy Statement - Information regarding certain relationships and related transactions, and director independence, is incorporated by reference from FICO's 2021 Proxy Statement[575] Item 14. Principal Accountant Fees and Services Information concerning principal accountant fees and services is incorporated by reference from FICO's 2021 Proxy Statement - Information regarding principal accountant fees and services is incorporated by reference from the 'Ratification of Independent Registered Public Accounting Firm' section of FICO's 2021 Proxy Statement[576] PART IV Part IV lists FICO's exhibits, financial statement schedules, and required signatures for the Form 10-K report Item 15. Exhibits and Financial Statement Schedules This section lists FICO's consolidated financial statements and schedules, including the auditor's report and detailed notes, along with a comprehensive list of exhibits - The consolidated financial statements include the Report of independent registered public accounting firm, Consolidated balance sheets, Consolidated statements of income and comprehensive income, Consolidated statements of stockholders' equity, Consolidated statements of cash flows, and Notes to consolidated financial statements[579] - All financial statement schedules are omitted as the required information is either not applicable or included in the consolidated financial statements and related notes[580] - A detailed list of exhibits, including organizational documents, debt agreements, incentive plans, and various letter agreements, is provided, with many incorporated by reference from previous SEC filings[582][583][585][586][587][588][589][590][591][596] Signatures This section contains the required signatures for the Form 10-K report from FICO's principal officers and Board of Directors, dated November 10, 2020 - The report is signed by William J. Lansing (CEO and Principal Executive Officer), Michael I. McLaughlin (EVP and Chief Financial Officer, Principal Financial Officer), Michael S. Leonard (VP and Chief Accounting Officer, Principal Accounting Officer), and several Directors[609] - All signatures are dated November 10, 2020[609]