FICO(US:FICO)2022-04-26 16:00PART I – FINANCIAL INFORMATION Item 1. Financial Statements Presents Fair Isaac Corporation's unaudited condensed consolidated financial statements as of March 31, 2022, including balance sheets, income, equity, and cash flow statements with detailed notes Condensed Consolidated Balance Sheets Total assets decreased to $1.49 billion while liabilities rose to $2.15 billion, increasing the stockholders' deficit to $663.4 million by March 31, 2022 Condensed Consolidated Balance Sheet Highlights (in thousands) | Account | March 31, 2022 | September 30, 2021 | | :--- | :--- | :--- | | Total Assets | $1,486,485 | $1,567,776 | | Cash and cash equivalents | $174,219 | $195,354 | | Goodwill | $783,744 | $788,185 | | Total Liabilities | $2,149,901 | $1,678,718 | | Long-term debt | $1,664,674 | $1,009,018 | | Total Stockholders' Deficit | ($663,416) | ($110,942) | Condensed Consolidated Statements of Income and Comprehensive Income Q2 2022 saw total revenues increase 8% to $357.2 million, with operating income up 50% to $152.1 million and diluted EPS rising 70% to $3.95 Quarter Ended March 31, 2022 vs 2021 (in thousands, except per share data) | Metric | Q2 2022 | Q2 2021 | % Change | | :--- | :--- | :--- | :--- | | Total Revenues | $357,195 | $331,361 | 8% | | Operating Income | $152,057 | $101,199 | 50% | | Net Income | $104,383 | $68,674 | 52% | | Diluted EPS | $3.95 | $2.33 | 70% | Six Months Ended March 31, 2022 vs 2021 (in thousands, except per share data) | Metric | Six Months 2022 | Six Months 2021 | % Change | | :--- | :--- | :--- | :--- | | Total Revenues | $679,556 | $643,775 | 6% | | Operating Income | $267,643 | $195,920 | 37% | | Net Income | $189,342 | $155,166 | 22% | | Diluted EPS | $7.02 | $5.23 | 34% | Condensed Consolidated Statements of Cash Flows Net cash from operations increased to $247.5 million, while financing activities used $263.2 million, primarily due to $760.9 million in stock repurchases Cash Flow Summary - Six Months Ended March 31 (in thousands) | Activity | 2022 | 2021 | | :--- | :--- | :--- | | Net cash provided by operating activities | $247,484 | $231,470 | | Net cash provided by (used in) investing activities | ($3,664) | $1,746 | | Net cash used in financing activities | ($263,162) | ($196,795) | | Increase (decrease) in cash | ($21,135) | $40,442 | - Financing activities were dominated by $760.9 million in common stock repurchases, funded by $800 million from credit facilities and $550 million from senior notes, offset by $806.8 million in repayments16 Notes to Condensed Consolidated Financial Statements Provides crucial context on accounting policies, revenue disaggregation, segment performance, debt structure, and share-based compensation, noting the fiscal 2021 segment restructuring into 'Scores' and 'Software' - In Q4 fiscal 2021, operating segments were consolidated from three to two, forming a new 'Software' segment alongside 'Scores', with retrospective financial adjustments2167 Disaggregated Revenue by Segment - Q2 2022 vs Q2 2021 (in thousands) | Segment | Q2 2022 | Q2 2021 | % Change | | :--- | :--- | :--- | :--- | | Scores | $183,742 | $168,719 | 9% | | Software | $173,453 | $162,642 | 7% | | Total | $357,195 | $331,361 | 8% | - Revenues from the three major consumer reporting agencies constituted 39% of total revenues in Q2 2022 and 2021, highlighting significant customer concentration54 Segment Operating Income - Q2 2022 vs Q2 2021 (in thousands) | Segment | Q2 2022 Operating Income | Q2 2022 Op. Margin | Q2 2021 Operating Income | Q2 2021 Op. Margin | | :--- | :--- | :--- | :--- | :--- | | Scores | $162,716 | 89% | $146,542 | 87% | | Software | $53,500 | 31% | $17,200 | 11% | Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Q2 2022 financial performance, highlighting an 8% revenue increase and 50% operating income growth, driven by segment performance, a business divestiture, liquidity, and critical accounting policies Financial Highlights - Quarter Ended March 31, 2022 | Metric | Q2 2022 | % Change (YoY) | | :--- | :--- | :--- | | Total Revenue | $357.2M | 8% | | Operating Income | $152.1M | 50% | | Net Income | $104.4M | 52% | | Diluted EPS | $3.95 | 70% | - The Software segment's Annual Recurring Revenue (ARR) reached $550.3 million as of March 31, 2022, an 11% increase year-over-year (excluding divestitures), with a Dollar-Based Net Retention Rate (DBNRR) of 110%9297101 - The company repurchased $264.0 million of common stock during the quarter and $757.6 million during the six months ended March 31, 202292154 Results of Operations Q2 2022 total revenues increased 8%, driven by 9% Scores growth and 7% Software growth, with operating income surging 50% due to revenue and C&R divestiture impacts - Scores segment revenue growth was driven by higher unit prices and increased B2C revenue from myFICO.com and royalties, offsetting declining mortgage origination volumes107 - Software segment revenue grew from a large license deal and continued SaaS growth, partially offset by a $15.9 million impact from the C&R divestiture and reduced professional services108 - Cost of revenues decreased by $16.5 million (19%) year-over-year, primarily due to lower personnel costs from the C&R business divestiture and reduced services business needs116 - The Software segment's operating margin dramatically increased to 31% in Q2 2022 from 11% in Q2 2021, driven by the C&R business divestiture, higher-margin license revenue, and reduced professional services138 Capital Resources and Liquidity The company held $174.2 million in cash, with $247.5 million net cash from operations, and increased debt to $1.79 billion to fund share repurchases, including a new $500 million program - Net cash from operating activities increased by $16.0 million for the six months ended March 31, 2022, primarily due to a $34.2 million increase in net income149 - In January 2022, the Board approved a new $500.0 million stock repurchase program, with $400.2 million remaining available as of March 31, 2022153154 - Total debt significantly increased, including $550 million in new 4.00% Senior Notes issued in December 2021, bringing total debt to $1.3 billion in Senior Notes and $511.3 million under credit facilities157158 Critical Accounting Policies and Estimates Outlines significant judgments and estimates in financial statements, covering revenue recognition, business combinations, goodwill impairment, share-based compensation, and income tax estimations - Significant judgment is required in revenue recognition, particularly in identifying distinct performance obligations and establishing standalone selling prices (SSP)168169 - Goodwill is assessed for impairment annually; a fiscal 2021 quantitative test, following reporting unit reorganization, showed no impairment due to substantial excess of fair value over carrying value179180 - Incremental commission costs are capitalized and amortized over a ten-year period, reflecting the expected life of customer relationships including renewals171 Item 3. Quantitative and Qualitative Disclosures About Market Risk The company faces market risks from interest rate fluctuations on debt and investments, and foreign exchange rate changes on foreign-currency-denominated balances, managed with short-term forward contracts - The company holds $1.3 billion in fixed-rate Senior Notes and $511.3 million in variable-rate debt, making interest expense sensitive to rate changes194195 - Foreign exchange risk is managed using short-term forward contracts (typically under three months) to hedge exposures in British pound, Euro, and Singapore dollar32196 Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective as of March 31, 2022, with no material changes to internal control over financial reporting during the quarter - The CEO and CFO concluded that disclosure controls and procedures were effective as of March 31, 2022200 - No material changes in internal control over financial reporting were identified during the quarter201 PART II – OTHER INFORMATION Item 1. Legal Proceedings The company reported no material legal proceedings for the period - The report indicates "Not applicable", signifying no material legal proceedings to disclose203 Item 1A. Risk Factors Details significant risks including COVID-19 uncertainty, customer concentration, potential cessation of FICO® Score use by GSEs, competition, cybersecurity threats, and evolving data privacy regulations - Significant customer concentration is noted, with 89% of fiscal 2021 revenues from the banking industry and a substantial portion from the three major U.S. consumer reporting agencies213220 - A material risk arises if Fannie Mae and Freddie Mac approve other credit score models or cease requiring the FICO® Score for mortgages, potentially impacting Scores segment revenue221 - The company faces routine cybersecurity threats from sophisticated actors; a breach could result in significant litigation, fines, and reputational damage248249 - Evolving global data privacy laws like GDPR and CCPA/CPRA impose significant compliance costs and risks of substantial fines for violations273275 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds Details stock repurchase activities for Q1 2022, including 579,875 shares repurchased for $264 million and a new $500 million program authorized in January 2022 Issuer Purchases of Equity Securities (Quarter Ended March 31, 2022) | Month (2022) | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | January | 374,875 | $437.96 | | February | 90,000 | $499.14 | | March | 115,000 | $477.35 | | Total | 579,875 | $455.31 (weighted avg) | - In January 2022, the Board of Directors approved a new stock repurchase program authorizing up to $500.0 million in share repurchases297 Item 6. Exhibits Lists exhibits filed with Form 10-Q, including corporate documents, CEO and CFO certifications, and interactive data files (XBRL) - Exhibits filed include CEO and CFO certifications pursuant to Sarbanes-Oxley Sections 302 and 906302