FICO(FICO) - 2023 Q1 - Quarterly Report

FORM 10-Q Filing Information Details Fair Isaac Corporation's Form 10-Q filing, including registrant information and compliance status Registrant Details Provides Fair Isaac Corporation's fundamental filing details, including name, jurisdiction, and stock exchange - Fair Isaac Corporation (FICO) filed its quarterly report on Form 10-Q for the period ended December 31, 2022[31] Key Registrant Details | Detail | Value | | :--- | :--- | | Registrant Name | Fair Isaac Corporation | | Jurisdiction of Incorporation | Delaware | | Registrant's Telephone Number | 406-982-7276 | | Trading Symbol | FICO | | Exchange Registered | New York Stock Exchange | Filing Status and Compliance Confirms the company's compliance with SEC filing requirements and its classification as a large accelerated filer - The registrant has filed all reports required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and has been subject to such filing requirements for the past 90 days[32] - The registrant has electronically submitted every Interactive Data File required pursuant to Rule 405 of Regulation S-T during the preceding 12 months[32] Filing Status | Status | Value | | :--- | :--- | | Large Accelerated Filer | Yes | | Accelerated Filer | No | | Non-Accelerated Filer | No | | Smaller Reporting Company | No | | Emerging Growth Company | No | | Shell Company | No | PART I – FINANCIAL INFORMATION Presents Fair Isaac Corporation's unaudited condensed consolidated financial statements and related disclosures Item 1. Unaudited Financial Statements Provides unaudited condensed consolidated financial statements and comprehensive notes on accounting policies and key financial areas Condensed Consolidated Balance Sheets Presents the balance sheet, showing slight increases in assets and liabilities, and stable stockholders' deficit Key Balance Sheet Data (In thousands) | Metric | Dec 31, 2022 | Sep 30, 2022 | | :--- | :--- | :--- | | Total Assets | $1,458,693 | $1,442,034 | | Total Liabilities | $2,260,788 | $2,243,981 | | Total Stockholders' Deficit | $(802,095) | $(801,947) | | Cash and Cash Equivalents | $139,856 | $133,202 | | Current Maturities on Debt | $100,000 | $30,000 | | Long-term Debt | $1,820,666 | $1,823,669 | Condensed Consolidated Statements of Income and Comprehensive Income Reports a 7% revenue increase, driven by software and Scores, with significant growth in net income and diluted EPS Key Income Statement Data (Quarter Ended Dec 31, In thousands, except per share data) | Metric | 2022 | 2021 | Change (%) | | :--- | :--- | :--- | :--- | | Revenues: | | | | | On-premises and SaaS software | $144,560 | $126,338 | 14.4% | | Professional services | $22,322 | $26,536 | (15.9)% | | Scores | $177,988 | $169,487 | 5.0% | | Total Revenues | $344,870 | $322,361 | 7.0% | | Operating Income | $140,339 | $115,586 | 21.4% | | Net Income | $97,643 | $84,959 | 14.9% | | Basic EPS | $3.90 | $3.13 | 24.6% | | Diluted EPS | $3.84 | $3.09 | 24.3% | | Foreign currency translation adjustments | $18,381 | $(2,138) | - | | Comprehensive Income | $116,024 | $82,821 | 40.1% | Condensed Consolidated Statements of Stockholders' Deficit Details the slight increase in stockholders' deficit, influenced by stock repurchases and employee plans Stockholders' Deficit Changes (In thousands) | Item | Balance at Sep 30, 2022 | Quarter Ended Dec 31, 2022 Activity | Balance at Dec 31, 2022 | | :--- | :--- | :--- | :--- | | Total Stockholders' Deficit | $(801,947) | $(148) | $(802,095) | | Share-based compensation | — | $29,702 | $29,702 | | Issuance of treasury stock under employee stock plans | — | $(70,870) | $(70,870) | | Repurchases of common stock | — | $(75,004) | $(75,004) | | Net income | — | $97,643 | $97,643 | | Foreign currency translation adjustments | — | $18,381 | $18,381 | Condensed Consolidated Statements of Cash Flows Shows decreased operating cash flow, increased investing cash use, and significantly reduced financing cash use Key Cash Flow Data (Quarter Ended Dec 31, In thousands) | Metric | 2022 | 2021 | Change | | :--- | :--- | :--- | :--- | | Net cash provided by operating activities | $92,440 | $124,881 | $(32,441) | | Net cash used in investing activities | $(10,590) | $(1,272) | $(9,318) | | Net cash used in financing activities | $(79,624) | $(155,429) | $75,805 | | Effect of exchange rate changes on cash | $4,428 | $(1,377) | $5,805 | | Increase (decrease) in cash and cash equivalents | $6,654 | $(33,197) | $39,851 | | Cash and cash equivalents, end of period | $139,856 | $162,157 | $(22,301) | Notes to Condensed Consolidated Financial Statements Provides detailed disclosures for interim financial statements, covering accounting policies, debt, revenue, and segment data Note 1. Nature of Business and Summary of Significant Accounting Policies Describes FICO's business as an applied analytics provider and outlines significant accounting policies - FICO is a leading applied analytics company, providing software and the FICO Score to businesses in nearly 120 countries and consumers through online services[43][87] - The accompanying unaudited interim condensed consolidated financial statements reflect all necessary adjustments for a fair presentation[60] - The adoption of ASU 2021-08, effective for fiscal years beginning after December 15, 2022, is not expected to have a significant impact on FICO's condensed consolidated financial statements[90] Note 2. Fair Value Measurements Details fair value measurements for financial assets, primarily Level 1 cash equivalents and marketable securities - Fair value is defined as the exit price in the principal or most advantageous market for an asset or liability[63] - FICO's Level 1 assets include money market funds and certain marketable securities, which use unadjusted quoted prices in active markets[91] Fair Value of Financial Assets (In thousands) | Asset | Dec 31, 2022 (Level 1) | Sep 30, 2022 (Level 1) | | :--- | :--- | :--- | | Cash equivalents | $18,166 | $19,314 | | Marketable securities | $26,332 | $24,515 | | Total | $44,498 | $43,829 | Note 3. Derivative Financial Instruments Explains FICO's use of short-term foreign currency forward contracts to manage exchange rate risk - FICO uses foreign currency forward contracts to manage foreign exchange rate risk on existing foreign-currency-denominated receivable and cash balances[94] - These derivative financial instruments are short-term, with maturity periods of less than three months, and are not designated as hedges[67][15] Gains on Foreign Currency Forward Contracts (Quarter Ended Dec 31, In thousands) | Metric | 2022 | 2021 | | :--- | :--- | :--- | | Gains on foreign currency forward contracts | $1,304 | $562 | Note 4. Goodwill and Intangible Assets Reports an increase in goodwill due to currency adjustments and a decrease in intangible asset amortization Goodwill by Segment (In thousands) | Segment | Sep 30, 2022 | Dec 31, 2022 | | :--- | :--- | :--- | | Scores | $146,648 | $146,648 | | Software | $614,419 | $624,807 | | Total Goodwill | $761,067 | $771,455 | Amortization Expense of Intangible Assets (Quarter Ended Dec 31, In thousands) | Intangible Asset | 2022 | 2021 | | :--- | :--- | :--- | | Completed technology | $125 | $125 | | Customer contracts and relationships | $150 | $419 | | Total Amortization Expense | $275 | $544 | Note 5. Composition of Certain Financial Statement Captions Details the composition of property and equipment, net, and other accrued liabilities Property and Equipment, Net (In thousands) | Metric | Dec 31, 2022 | Sep 30, 2022 | | :--- | :--- | :--- | | Property and equipment | $112,926 | $112,411 | | Less: accumulated depreciation and amortization | $(97,950) | $(94,831) | | Total | $14,976 | $17,580 | Other Accrued Liabilities (In thousands) | Metric | Dec 31, 2022 | Sep 30, 2022 | | :--- | :--- | :--- | | Interest payable | $6,349 | $21,314 | | Current operating leases | $18,360 | $19,369 | | Other | $26,669 | $25,565 | | Total | $51,378 | $66,248 | Note 6. Revolving Line of Credit and Term Loan Details FICO's revolving line of credit and term loan, including outstanding balances and interest rates - FICO has a $600 million unsecured revolving line of credit and a $300 million unsecured term loan, maturing on August 19, 2026[99] - In November 2022, the credit agreement was amended to replace the LIBOR reference rate with the Secured Overnight Financing Rate (SOFR)[99] Outstanding Borrowings and Interest Rates (Dec 31, 2022, In millions) | Debt Type | Outstanding Balance | Weighted-Average Interest Rate | | :--- | :--- | :--- | | Revolving Line of Credit | $350.0 | 5.817% | | Term Loan | $285.0 | 6.051% | Note 7. Senior Notes Outlines FICO's $1.3 billion Senior Notes, their interest rates, fair value, and covenant compliance - FICO issued $400 million of 2018 Senior Notes (5.25% due May 15, 2026), $350 million of 2019 Senior Notes (4.00% due June 15, 2028), and $550 million of 2021 Senior Notes (4.00% due June 15, 2028)[292][75][100] - The company was in compliance with all financial covenants under the Senior Notes indentures as of December 31, 2022[76] Senior Notes Face and Fair Values (In thousands) | Senior Notes | Dec 31, 2022 Face Value | Dec 31, 2022 Fair Value | Sep 30, 2022 Face Value | Sep 30, 2022 Fair Value | | :--- | :--- | :--- | :--- | :--- | | The 2018 Senior Notes | $400,000 | $390,000 | $400,000 | $381,500 | | The 2019 Senior Notes and the 2021 Senior Notes | $900,000 | $812,250 | $900,000 | $767,250 | | Total | $1,300,000 | $1,202,250 | $1,300,000 | $1,148,750 | Note 8. Revenue from Contracts with Customers Disaggregates revenue by geography, software deployment, and product features, noting key customer concentrations Disaggregated Revenue by Geographical Market (Quarter Ended Dec 31, 2022, In thousands) | Region | Scores | Software | Total | Percentage | | :--- | :--- | :--- | :--- | :--- | | Americas | $173,297 | $117,830 | $291,127 | 85% | | Europe, Middle East and Africa | $1,348 | $30,992 | $32,340 | 9% | | Asia Pacific | $3,343 | $18,060 | $21,403 | 6% | | Total | $177,988 | $166,882 | $344,870 | 100% | Disaggregated Software Revenue by Deployment Method (Quarter Ended Dec 31, In thousands) | Deployment Method | 2022 | 2021 | 2022 Percentage | 2021 Percentage | | :--- | :--- | :--- | :--- | :--- | | On-premises software | $64,922 | $57,295 | 45% | 45% | | SaaS software | $79,638 | $69,043 | 55% | 55% | | Total on-premises and SaaS software | $144,560 | $126,338 | 100% | 100% | - Revenues from TransUnion, Equifax, and Experian collectively accounted for 36% of total revenues in Q4 2022, with two agencies each contributing over 10%[106] - Revenue allocated to remaining performance obligations was $406.8 million as of December 31, 2022, with approximately 51% expected to be recognized over the next 17 months[134] Note 9. Income Taxes Discusses the effective income tax rate and the impact of new R&E capitalization provisions Effective Income Tax Rate (Quarter Ended Dec 31) | Year | Effective Tax Rate | | :--- | :--- | | 2022 | 17.2% | | 2021 | 18.9% | - The effective tax rates were favorably impacted by excess tax benefits relating to stock awards, with an increased net excess tax benefit in Q4 2022 compared to Q4 2021 due to an increase in stock price for vested awards[135] - A provision from the 2017 Tax Cuts and Jobs Act, effective October 1, 2022, requires capitalization of research and experimental expenditures for tax purposes, which is expected to significantly increase fiscal 2023 cash tax payments and deferred tax asset positions[111] Note 10. Share-Based Employee Benefit Plans Summarizes activity for FICO's share-based employee benefit plans, including RSUs and PSUs - FICO maintains the 2021 Long-Term Incentive Plan for equity awards, including stock options, stock appreciation rights, restricted stock awards, stock unit awards, and other share-based awards[138] Restricted Stock Unit Activity (Quarter Ended Dec 31, 2022, In thousands) | Activity | Shares | Weighted-average Grantdate Fair Value | | :--- | :--- | :--- | | Outstanding at Sep 30, 2022 | 415 | $398.07 | | Granted | 149 | $610.04 | | Released | (146) | $349.76 | | Forfeited | (18) | $420.56 | | Outstanding at Dec 31, 2022 | 400 | $493.36 | Performance Share Unit Activity (Quarter Ended Dec 31, 2022, In thousands) | Activity | Shares | Weighted-average Grantdate Fair Value | | :--- | :--- | :--- | | Outstanding at Sep 30, 2022 | 144 | $432.73 | | Granted | 30 | $615.45 | | Released | (66) | $428.90 | | Forfeited | (10) | $436.82 | | Outstanding at Dec 31, 2022 | 98 | $490.75 | Note 11. Earnings per Share Reports increased basic and diluted earnings per share due to higher net income and lower share count Earnings Per Share (Quarter Ended Dec 31, In thousands, except per share data) | Metric | 2022 | 2021 | | :--- | :--- | :--- | | Net income | $97,643 | $84,959 | | Basic weighted-average shares | 25,045 | 27,167 | | Diluted weighted-average shares | 25,443 | 27,524 | | Basic EPS | $3.90 | $3.13 | | Diluted EPS | $3.84 | $3.09 | - Anti-dilutive share-based awards excluded from diluted EPS calculations were immaterial[118] Note 12. Segment Information Describes FICO's two reportable segments, Scores and Software, and their respective offerings - FICO's two reportable segments are Scores and Software[124][169] - The Scores segment includes B2B and B2C scoring solutions, such as myFICO.com offerings[143][175] - The Software segment includes pre-configured analytic and decision management solutions, FICO Platform, and professional services, available as SaaS or on-premises software[143][148] Segment Operating Income (Quarter Ended Dec 31, 2022, In thousands) | Segment | Total Segment Revenues | Segment Operating Expense | Segment Operating Income | | :--- | :--- | :--- | :--- | | Scores | $177,988 | $(21,296) | $156,692 | | Software | $166,882 | $(121,117) | $45,765 | | Unallocated Corporate Expenses | — | $(34,082) | $(34,082) | | Total | $344,870 | $(176,495) | $168,375 | Note 13. Contingencies Addresses FICO's involvement in legal disputes and the accounting for potential litigation losses - FICO is involved in disputes with customers regarding amounts owed and claims from former employees related to compensation and employment matters[146] - Litigation accruals are recorded for legal matters that are both probable and estimable[146] - For legal proceedings with a reasonable possibility of loss, FICO has determined there is no material exposure on an aggregate basis[146] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Discusses FICO's financial condition, operational results, liquidity, and critical accounting estimates for the quarter FORWARD-LOOKING STATEMENTS Cautions readers about forward-looking statements, emphasizing inherent risks and uncertainties - Statements in the report that are not historical facts are considered forward-looking statements, subject to risks and uncertainties[123] - Factors that could cause actual results to differ materially are described in Part I, Item 1A 'Risk Factors' of the Annual Report on Form 10-K[123] - FICO undertakes no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made[123] OVERVIEW Provides an overview of FICO as an applied analytics company, its offerings, and global reach - FICO is a leading applied analytics company, founded in 1956, that uses data to improve business decisions[148] - FICO's software and the FICO Score operationalize analytics for businesses in nearly 120 countries and provide consumer services for financial literacy[148] Highlights from the quarter ended December 31, 2022 Summarizes key financial and operational achievements, including revenue growth and EPS increase Key Financial and Operational Highlights (Quarter Ended Dec 31, 2022, In millions, except percentages and per share data) | Metric | Value | YoY Change | | :--- | :--- | :--- | | Total Revenue | $344.9 | +7% | | Scores Segment Revenue | $178.0 | +5% | | Software Segment Annual Recurring Revenue (ARR) | $582.9 | +11% | | Software Segment Dollar-Based Net Retention Rate (DBNRR) | 110% | - | | Operating Income | $140.3 | +21% | | Net Income | $97.6 | +15% | | Diluted EPS | $3.84 | +24% | | Cash Flows from Operations | $92.4 | vs. $124.9 (2021) | | Cash and Cash Equivalents | $139.9 | vs. $133.2 (Sep 30, 2022) | | Total Debt Balance | $1.9 billion | Stable | | Total Share Repurchases | $75.0 | vs. $493.6 (2021) | Key performance metrics for Software segment Details key performance metrics for the Software segment, including ACV Bookings, ARR, and DBNRR - ACV Bookings represent the average annualized value of software contracts signed, excluding perpetual licenses and non-recurring software revenues[150][178] ACV Bookings for On-premises and SaaS Software (Quarter Ended Dec 31, In millions) | Metric | 2022 | 2021 | | :--- | :--- | :--- | | Total on-premises and SaaS software ACV Bookings | $21.5 | $16.4 | - ARR is the annualized revenue run-rate of on-premises and SaaS software agreements, used to measure underlying performance of subscription-based contracts[154][180] Annual Recurring Revenue (ARR) for On-premises and SaaS Software (In millions) | Metric | Dec 31, 2021 | Dec 31, 2022 | YoY Change (%) | | :--- | :--- | :--- | :--- | | Platform | $90.9 | $132.8 | 46% | | Nonplatform | $433.4 | $450.1 | 4% | | Total ARR | $524.3 | $582.9 | 11% | - DBNRR measures success in retaining and growing revenue from existing customers, including additional product sales, price increases, and usage-based fees, while accounting for attrition[156][182] Dollar-Based Net Retention Rate (DBNRR) for On-premises and SaaS Software | Metric | Dec 31, 2021 | Dec 31, 2022 | | :--- | :--- | :--- | | Platform | 146% | 130% | | Nonplatform | 102% | 103% | | Total DBNRR | 109% | 110% | RESULTS OF OPERATIONS Analyzes FICO's operational results, highlighting revenue growth, expense changes, and increased operating income Revenues Details the 7% increase in total revenues, driven by growth in both Scores and Software segments Segment Revenues (Quarter Ended Dec 31, In thousands) | Segment | 2022 | 2021 | Period-to-Period Change | Percentage Change | | :--- | :--- | :--- | :--- | :--- | | Scores | $177,988 | $169,487 | $8,501 | 5% | | Software | $166,882 | $152,874 | $14,008 | 9% | | Total | $344,870 | $322,361 | $22,509 | 7% | - Scores segment revenue increase was primarily due to a multi-year license renewal, higher unit prices, and increased unsecured credit originations volume, partially offset by decreased mortgage originations and B2C revenue[255] - Software segment revenue increase was driven by an $18.2 million increase in on-premises and SaaS software revenue (including $8.8 million from platform software and $9.4 million from non-platform software), partially offset by a $4.2 million decrease in professional services revenue due to a strategic shift[189] Operating Expenses and Other Income, Net Analyzes changes in operating expenses, including cost of revenues, R&D, SG&A, and other income/expense Operating Expenses and Other Income, Net (Quarter Ended Dec 31, In thousands) | Metric | 2022 | 2021 | Period-to-Period Change | Percentage Change | | :--- | :--- | :--- | :--- | :--- | | Cost of revenues | $76,569 | $69,203 | $7,366 | 11% | | Research and development | $36,633 | $38,980 | $(2,347) | (6)% | | Selling, general and administrative | $92,995 | $98,048 | $(5,053) | (5)% | | Amortization of intangible assets | $275 | $544 | $(269) | (49)% | | Gain on product line asset sale | $(1,941) | — | $(1,941) | — | | Total operating expenses | $204,531 | $206,775 | $(2,244) | (1)% | | Interest expense, net | $(22,800) | $(12,195) | $(10,605) | 87% | | Other income, net | $364 | $1,429 | $(1,065) | (75)% | - Cost of revenues increased primarily due to a $9.2 million increase in personnel and labor costs and a $0.5 million increase in travel costs, partially offset by a $2.2 million decrease in direct materials costs[223] - Selling, general and administrative expenses decreased primarily due to a $5.5 million decrease in personnel and labor costs and a $2.6 million decrease in facilities and infrastructure costs, partially offset by increased travel and marketing costs[193] Operating Income Reports a 21% increase in total operating income, driven by revenue growth and expense management Operating Income by Segment (Quarter Ended Dec 31, In thousands) | Segment | 2022 Operating Income | 2021 Operating Income | Period-to-Period Change | Percentage Change | | :--- | :--- | :--- | :--- | :--- | | Scores | $156,692 | $148,323 | $8,369 | 6% | | Software | $45,765 | $34,837 | $10,928 | 31% | | Unallocated corporate expenses | $(34,082) | $(37,152) | $3,070 | (8)% | | Total Operating Income | $140,339 | $115,586 | $24,753 | 21% | - Scores segment operating income as a percentage of segment revenue remained consistent at 88%[200] - Software segment operating income as a percentage of segment revenue increased to 27% from 23%, primarily due to an increase in higher-margin license revenue recognized at a point in time and a decrease in sales of lower-margin professional services[201] CAPITAL RESOURCES AND LIQUIDITY Discusses FICO's cash position, liquidity, and changes in operating, investing, and financing cash flows Outlook Projects sufficient liquidity for future operations, with potential for acquisitions or debt/equity financing - Cash and cash equivalents, including foreign holdings, and available borrowings from the $600 million revolving line of credit are expected to be sufficient for working capital and capital requirements for at least the next 12 months[234] - FICO may use available cash for acquisitions or establish strategic relationships, and may raise additional funds through debt or equity if needed[203] Summary of Cash Flows Summarizes changes in cash flows from operating, investing, and financing activities Summary of Cash Flows (Quarter Ended Dec 31, In thousands) | Cash Flow Activity | 2022 | 2021 | Period-to-Period Change | | :--- | :--- | :--- | :--- | | Operating activities | $92,440 | $124,881 | $(32,441) | | Investing activities | $(10,590) | $(1,272) | $(9,318) | | Financing activities | $(79,624) | $(155,429) | $75,805 | | Effect of exchange rate changes on cash | $4,428 | $(1,377) | $5,805 | | Increase (decrease) in cash and cash equivalents | $6,654 | $(33,197) | $39,851 | Cash Flows from Operating Activities Details the $32.4 million decrease in operating cash flow, driven by timing and non-cash items - Net cash provided by operating activities decreased by $32.4 million, from $124.9 million in Q4 2021 to $92.4 million in Q4 2022[235] - The decrease was attributable to the timing of receipts and payments ($29.1 million) and a decrease in non-cash items ($16.0 million), partially offset by a $12.7 million increase in net income[235] Cash Flows from Investing Activities Explains the $9.3 million increase in cash used for investing activities, mainly from asset sales - Net cash used in investing activities increased to $10.6 million in Q4 2022 from $1.3 million in Q4 2021[206] - The $9.3 million increase was primarily attributable to a $9.8 million decrease in cash proceeds from product line asset sales, net of cash transferred[206] Cash Flows from Financing Activities Details the $75.8 million decrease in cash used for financing, primarily due to reduced stock repurchases - Net cash used in financing activities decreased by $75.8 million, from $155.4 million in Q4 2021 to $79.6 million in Q4 2022[207] - The decrease was primarily due to a $407.8 million decrease in common stock repurchases and a $234.3 million decrease in net payments on the revolving line of credit[207] - This was partially offset by a $550.0 million decrease in proceeds from senior notes issuance and a $25.8 million increase in taxes paid related to net share settlement of equity awards[207] Repurchases of Common Stock Reports a significant decrease in common stock repurchases and details a new $500 million repurchase program Common Stock Repurchases (Quarter Ended Dec 31, In millions) | Metric | 2022 | 2021 | | :--- | :--- | :--- | | Total Repurchases | $75.0 | $493.6 | - In October 2022, a new open-ended stock repurchase program was approved, authorizing repurchases up to an aggregate cost of $500.0 million[208] - As of December 31, 2022, $451.1 million remained under the October 2022 repurchase program[282] Revolving Line of Credit and Term Loan Details FICO's revolving line of credit and term loan, including outstanding balances and interest rates - FICO maintains a $600 million unsecured revolving line of credit and a $300 million unsecured term loan, maturing on August 19, 2026[209] - In November 2022, the credit agreement was amended to replace the LIBOR reference rate with the Secured Overnight Financing Rate (SOFR)[209] Outstanding Borrowings and Interest Rates (Dec 31, 2022, In millions) | Debt Type | Outstanding Balance | Weighted-Average Interest Rate | | :--- | :--- | :--- | | Revolving Line of Credit | $350.0 | 5.817% | | Term Loan | $285.0 | 6.051% | Senior Notes Outlines FICO's $1.3 billion Senior Notes, their interest rates, and covenant compliance - FICO has $400 million of 2018 Senior Notes (5.25% due May 15, 2026), $350 million of 2019 Senior Notes (4.00% due June 15, 2028), and $550 million of 2021 Senior Notes (4.00% due June 15, 2028)[211] - As of December 31, 2022, the carrying value of the Senior Notes was $1.3 billion, and FICO was in compliance with all financial covenants[211] CRITICAL ACCOUNTING ESTIMATES Identifies FICO's critical accounting estimates, including revenue recognition, impairment, and income taxes Revenue Recognition Explains FICO's revenue recognition policies for software, SaaS, and professional services - Revenue is primarily derived from on-premises software and SaaS subscriptions, professional services, and scoring services[243] - On-premises software license revenue is recognized at a point in time when the software is made available, while maintenance revenue is recognized ratably[214] - SaaS product revenue, including guaranteed minimums and consumption-based fees, is recognized ratably over the service period[215] - Professional services revenue is recognized using an input method based on labor hours for fixed-price contracts or the 'right-to-invoice' expedient for time and materials[267] - Significant judgment is required to determine standalone selling prices (SSPs) for distinct performance obligations, considering historical sales data, pricing practices, and market conditions[268] Capitalized Commission Costs Describes the capitalization and amortization policy for incremental commission costs - Incremental commission fees paid for obtaining customer contracts are capitalized[218] - Capitalized commission costs are amortized on a straight-line basis over ten years, included in selling, general, and administrative expenses[218] - A practical expedient is applied to expense incremental costs when incurred if the amortization period is one year or less[270] Goodwill and Other Long-Lived Assets - Impairment Assessment Outlines the impairment assessment methodology for goodwill and other long-lived assets - Goodwill is assessed for impairment annually during the fourth fiscal quarter, using a qualitative 'step zero' approach[219] - If a qualitative assessment indicates impairment is more likely than not, a quantitative 'step one' test is performed using discounted cash flow models and comparable publicly-traded companies[219] - Other long-lived assets are assessed for impairment when indicators are identified, using undiscounted projected cash flows[249] - Historically, there have been no significant changes in estimates or assumptions that would have a material impact on impairment assessments[220] Share-Based Compensation Details the measurement and recognition of share-based compensation using valuation models - Share-based compensation cost is measured at grant date fair value and recognized as expense over the vesting or service period[273] - The Black-Scholes valuation model is used for stock options, and a Monte Carlo valuation model for market share units[273] - Valuation models require assumptions and judgments regarding stock price volatility, expected dividend yield, employee turnover rates, and stock option exercise behaviors[273] Income Taxes Explains the estimation of income taxes, deferred taxes, and uncertain tax positions - Income taxes are estimated based on various jurisdictions, involving significant judgment in determining the provision, deferred tax assets/liabilities, and valuation allowances[251] - Uncertain tax positions are evaluated using a two-step approach: determining if the position is more likely than not to be sustained upon audit, and then measuring the tax benefit as the largest amount more than 50% likely of being realized[274] - Changes in the recognition or measurement of uncertain tax positions could result in material increases or decreases in income tax expense[274] Contingencies and Litigation Addresses FICO's legal contingencies and the accounting for potential litigation losses - FICO is subject to various proceedings, lawsuits, and claims related to products, services, technology, labor, and other matters[253] - A liability for estimated loss is accrued if the potential loss is considered probable and the amount can be reasonably estimated[253] - Significant judgment is required in assessing the likelihood and determining the range of potential losses, but no material changes in estimates or assumptions are expected[253] Recent Accounting Pronouncements Not Yet Adopted Discusses the expected impact of ASU 2021-08 on FICO's financial statements - ASU 2021-08, 'Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers,' is effective for FICO's fiscal year beginning October 1, 2023[276] - FICO does not believe that the adoption of ASU 2021-08 will have a significant impact on its consolidated financial statements[276] Item 3. Quantitative and Qualitative Disclosures about Market Risk Discloses FICO's exposure to market risks, including interest rate and foreign exchange rate fluctuations - FICO is exposed to market risk related to changes in interest rates and foreign exchange rates[277] - The company does not use derivative financial instruments for speculative or trading purposes[277] Interest Rate Risk Addresses interest rate risk on FICO's investment portfolio and its expected impact - FICO maintains an investment portfolio of bank deposits and money market funds, which are subject to interest rate risk[11] - The company does not expect its operating results or cash flows to be significantly affected by a sudden change in market interest rates[11] Cash and Cash Equivalents with Interest Rate Risk (In thousands) | Metric | Dec 31, 2022 Carrying Amount | Dec 31, 2022 Average Yield | Sep 30, 2022 Carrying Amount | Sep 30, 2022 Average Yield | | :--- | :--- | :--- | :--- | :--- | | Cash and cash equivalents | $139,856 | 2.41% | $133,202 | 1.23% | Senior Notes Discusses the fair value fluctuations of FICO's Senior Notes due to market interest rates - The fair value of the Senior Notes may increase or decrease due to various factors, including fluctuations in market interest rates and general economic conditions[13] Senior Notes Face and Fair Values (In thousands) | Senior Notes | Dec 31, 2022 Face Value | Dec 31, 2022 Fair Value | Sep 30, 2022 Face Value | Sep 30, 2022 Fair Value | | :--- | :--- | :--- | :--- | :--- | | The 2018 Senior Notes | $400,000 | $390,000 | $400,000 | $381,500 | | The 2019 Senior Notes and the 2021 Senior Notes | $900,000 | $812,250 | $900,000 | $767,250 | | Total | $1,300,000 | $1,202,250 | $1,300,000 | $1,148,750 | Revolving Line of Credit and Term Loan Addresses interest rate risk associated with FICO's variable-rate revolving line of credit and term loan - FICO has interest rate risk with respect to its unsecured revolving line of credit and term loan, as interest rates are variable[14] - Interest rates are based on an adjusted base rate or an adjusted term SOFR rate, plus an applicable margin determined by the consolidated leverage ratio[14] Outstanding Variable Rate Debt (Dec 31, 2022, In millions) | Debt Type | Outstanding Balance | Weighted-Average Interest Rate | | :--- | :--- | :--- | | Revolving Line of Credit | $350.0 | 5.817% | | Term Loan | $285.0 | 6.051% | Foreign Currency Forward Contracts Explains FICO's use of short-term foreign currency forward contracts to manage exchange rate risk - FICO maintains a program to manage foreign exchange rate risk on foreign-currency-denominated receivable and cash balances by entering into forward contracts[15] - All foreign currency forward contracts have maturity periods of less than three months[15] Outstanding Foreign Currency Forward Contracts (Dec 31, 2022, In thousands) | Type | Currency | Contract Amount | USD Amount | Fair Value USD | | :--- | :--- | :--- | :--- | :--- | | Sell foreign currency | EUR | 10,100 | $10,766 | $0 | | Buy foreign currency | GBP | 7,072 | $8,500 | $0 | | Buy foreign currency | SGD | 4,688 | $3,500 | $0 | Item 4. Controls and Procedures Details the evaluation of FICO's disclosure controls and procedures, confirming their effectiveness Evaluation of Disclosure Controls and Procedures Confirms the effectiveness of FICO's disclosure controls and procedures as of December 31, 2022 - FICO's management, including the CEO and CFO, evaluated the effectiveness of disclosure controls and procedures[2] - The CEO and CFO concluded that FICO's disclosure controls and procedures were effective as of December 31, 2022[2] - These controls ensure timely recording, processing, summarizing, and reporting of information required for SEC filings, and communication to management for disclosure decisions[2] Changes in Internal Control over Financial Reporting States no material changes in internal control over financial reporting occurred during the quarter - No material change in FICO's internal control over financial reporting was identified during the period covered by this quarterly report[3] - The identified changes have not materially affected, nor are they reasonably likely to materially affect, FICO's internal control over financial reporting[3] PART II – OTHER INFORMATION Provides additional information including legal proceedings, risk factors, equity sales, and exhibits Item 1. Legal Proceedings States that legal proceedings are not applicable for this reporting period - Legal proceedings are not applicable for this reporting period[5][22] Item 1A. Risk Factors Refers to the Annual Report for risk factors, noting no material changes - Readers should carefully consider the risk factors discussed in Part I, Item 1A 'Risk Factors' in FICO's Annual Report on Form 10-K for the fiscal year ended September 30, 2022[6] - There have been no material changes from the risk factors disclosed in the Annual Report on Form 10-K[6] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds Details common stock repurchases and the approval of a new $500 million repurchase program Issuer Purchases of Equity Securities (Quarter Ended Dec 31, 2022, In millions, except per share data) | Period | Average Price Paid per Share | Total Number of Shares Purchased | Maximum Dollar Value Remaining Under Plans | | :--- | :--- | :--- | :--- | | Oct 1, 2022 – Oct 31, 2022 | $417.65 | 179,637 | $451.06 | | Nov 1, 2022 – Nov 30, 2022 | $485.11 | — | $451.06 | | Dec 1, 2022 – Dec 31, 2022 | $615.42 | — | $451.06 | | Total | $495.82 | 179,637 | $451.06 | - In October 2022, FICO's Board of Directors approved a new open-ended stock repurchase program, authorizing repurchases of common stock up to an aggregate cost of $500.0 million[7] - This new program replaced the previously authorized January 2022 program[7] Item 3. Defaults Upon Senior Securities States that defaults upon senior securities are not applicable for this period - Defaults upon senior securities are not applicable for this reporting period[8][22] Item 4. Mine Safety Disclosures States that mine safety disclosures are not applicable for this period - Mine safety disclosures are not applicable for this reporting period[9][22] Item 5. Other Information Notes that no specific other information is provided in this section - No specific other information is provided in this section[10] Item 6. Exhibits Lists all exhibits filed as part of the Form 10-Q, including certifications and XBRL documents List of Exhibits | Exhibit Number | Description | | :--- | :--- | | 3.1 | Composite Restated Certificate of Incorporation of Fair Isaac Corporation | | 3.2 | By-laws of Fair Isaac Corporation | | 10.1 * | Second Amendment to Second Amended and Restated Credit Agreement | | 31.1 * | Rule 13a-14(a)/15d-14(a) Certifications of CEO | | 31.2 * | Rule 13a-14(a)/15d-14(a) Certifications of CFO | | 32.1 * | Section 1350 Certification of CEO | | 32.2 * | Section 1350 Certification of CFO | | 101.INS * | Inline XBRL Instance Document | | 101.SCH * | Inline XBRL Taxonomy Extension Schema Document | | 101.CAL * | Inline XBRL Taxonomy Extension Calculation Linkbase Document | | 101.DEF * | Inline XBRL Taxonomy Extension Definition Linkbase Document | | 101.LAB * | Inline XBRL Taxonomy Extension Label Linkbase Document | | 101.PRE * | Inline XBRL Taxonomy Extension Presentation Linkbase Document | | 104 * | Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101) | SIGNATURES Contains the required signatures of Fair Isaac Corporation's authorized officers, certifying the report - The report is duly signed on behalf of Fair Isaac Corporation by its authorized officers[27] - Signatories include Steven P. Weber (Vice President and Interim Chief Financial Officer) and Michael S. Leonard (Vice President and Chief Accounting Officer)[28] - The report was signed on January 26, 2023[19][28]