FICO(FICO) - 2021 Q1 - Quarterly Report

Form 10-Q Filing Information Fair Isaac Corporation (FICO) filed its Quarterly Report on Form 10-Q for the period ended December 31, 2020 - Fair Isaac Corporation (FICO) filed its Quarterly Report on Form 10-Q for the period ended December 31, 2020[1][2] - The registrant is a large accelerated filer and has filed all required reports and interactive data files during the preceding 12 months[3] - As of January 15, 2021, there were 29,236,110 shares of common stock outstanding, excluding treasury stock[6] PART I – FINANCIAL INFORMATION This part presents FICO's financial statements and management's analysis of its financial condition and operations Item 1. Financial Statements This section presents FICO's unaudited condensed consolidated financial statements, reflecting its financial position and performance Condensed Consolidated Balance Sheets This section details FICO's financial position, including assets, liabilities, and stockholders' equity at specific dates | Metric (In thousands) | December 31, 2020 | September 30, 2020 | | :-------------------- | :------------------ | :------------------- | | Assets | | | | Total current assets | $508,441 | $534,078 | | Goodwill | $817,777 | $812,364 | | Total assets | $1,576,863 | $1,606,240 | | Liabilities | | | | Total current liabilities | $391,042 | $414,511 | | Long-term debt | $739,831 | $739,435 | | Total liabilities | $1,252,742 | $1,275,158 | | Stockholders' Equity | | | | Total stockholders' equity | $324,121 | $331,082 | Condensed Consolidated Statements of Income and Comprehensive Income This section outlines FICO's financial performance, presenting revenues, expenses, and net income for the reported periods | Metric (In thousands, except per share data) | Quarter Ended Dec 31, 2020 | Quarter Ended Dec 31, 2019 | | :------------------------------------------- | :------------------------- | :------------------------- | | Total revenues | $312,414 | $298,504 | | Total operating expenses | $217,693 | $246,622 | | Operating income | $94,721 | $51,882 | | Income before income taxes | $87,960 | $41,895 | | Net income | $86,492 | $54,921 | | Comprehensive income | $103,540 | $69,013 | | Basic EPS | $2.97 | $1.89 | | Diluted EPS | $2.90 | $1.82 | Condensed Consolidated Statements of Stockholders' Equity This section details changes in FICO's equity accounts, including common stock, retained earnings, and treasury stock | Metric (In thousands) | Balance at Sep 30, 2020 | Balance at Dec 31, 2020 | | :-------------------- | :---------------------- | :---------------------- | | Common Stock Par Value | $291 | $292 | | Additional Paid-in Capital | $1,218,583 | $1,145,893 | | Treasury Stock | $(2,997,856) | $(3,035,668) | | Retained Earnings | $2,193,059 | $2,279,551 | | Accumulated Other Comprehensive Loss | $(82,995) | $(65,947) | | Total Stockholders' Equity | $331,082 | $324,121 | - Net income for the quarter ended December 31, 2020, was $86,492 thousand, contributing to retained earnings[13] - The company repurchased common stock totaling $50,011 thousand during the quarter[13] Condensed Consolidated Statements of Cash Flows This section reports on FICO's cash inflows and outflows from operating, investing, and financing activities | Metric (In thousands) | Quarter Ended Dec 31, 2020 | Quarter Ended Dec 31, 2019 | | :-------------------- | :------------------------- | :------------------------- | | Net cash provided by operating activities | $77,947 | $60,365 | | Net cash provided by (used in) investing activities | $3,862 | $(9,011) | | Net cash used in financing activities | $(99,808) | $(48,195) | | Effect of exchange rate changes on cash | $5,267 | $1,631 | | Increase (decrease) in cash and cash equivalents | $(12,732) | $4,790 | | Cash and cash equivalents, end of period | $144,662 | $111,216 | Notes to Condensed Consolidated Financial Statements This section provides detailed explanations and additional information supporting the condensed consolidated financial statements 1. Nature of Business This note describes FICO's core business, products, services, and the basis of financial statement preparation - FICO provides analytic, software, and data management products and services to automate, improve, and connect decisions for businesses[18] - The company serves banks, credit reporting agencies, insurers, retailers, healthcare organizations, and public agencies[18] - Unaudited interim condensed consolidated financial statements are prepared in accordance with Form 10-Q instructions and applicable accounting guidance[19] 2. Fair Value Measurements This note details the fair value hierarchy and valuation methods used for FICO's financial assets and liabilities - Fair value is categorized into a three-level hierarchy based on input observability[27] - Level 1 assets include money market funds and certain marketable securities, valued using unadjusted quoted prices in active markets[28] | Assets (In thousands) | December 31, 2020 (Level 1) | September 30, 2020 (Level 1) | | :-------------------- | :-------------------------- | :--------------------------- | | Cash equivalents | $10,694 | $35,275 | | Marketable securities | $28,455 | $25,513 | | Total | $39,149 | $60,788 | 3. Derivative Financial Instruments This note explains FICO's use of foreign currency forward contracts to manage exchange rate risks - FICO uses foreign currency forward contracts to manage risks from fluctuations in foreign exchange rates, primarily for British pound, Euro, and Singapore dollar exposures[32] - These contracts are not designated as hedges and are marked to market through other income, net, to mitigate changes in remeasured receivable and cash balances[33] | Metric (In thousands) | Quarter Ended Dec 31, 2020 | Quarter Ended Dec 31, 2019 | | :-------------------- | :------------------------- | :------------------------- | | Gains on foreign currency forward contracts | $1,686 | $1,145 | 4. Goodwill and Intangible Assets This note provides details on amortization expenses for FICO's goodwill and intangible assets | Amortization Expense (In thousands) | Quarter Ended Dec 31, 2020 | Quarter Ended Dec 31, 2019 | | :---------------------------------- | :------------------------- | :------------------------- | | Completed technology | $322 | $575 | | Customer contracts and relationships | $571 | $1,140 | | Trade names | — | $37 | | Non-compete agreements | $44 | $44 | | Total | $937 | $1,796 | 5. Composition of Certain Financial Statement Captions This note breaks down the components of FICO's property and equipment, and other assets | Metric (In thousands) | December 31, 2020 | September 30, 2020 | | :-------------------- | :---------------- | :----------------- | | Property and equipment, net: | | | | Property and equipment | $156,053 | $161,119 | | Less: accumulated depreciation and amortization | $(117,042) | $(114,700) | | Total | $39,011 | $46,419 | | Other assets: | | | | Long-term receivables | $50,566 | $54,074 | | Prepaid commissions | $40,159 | $38,579 | | Others | $11,727 | $12,632 | | Total | $102,452 | $105,285 | 6. Revolving Line of Credit This note outlines the terms and outstanding balance of FICO's unsecured revolving line of credit - FICO has a $400 million unsecured revolving line of credit expiring May 8, 2023, with an option to increase by $100 million[42] - As of December 31, 2020, $131.0 million was outstanding at a weighted-average interest rate of 1.284%, and the company was in compliance with all financial covenants[42] 7. Senior Notes This note details FICO's outstanding senior notes, including face and fair values - The company has $400 million in 2018 Senior Notes (5.25% interest, maturing May 15, 2026) and $350 million in 2019 Senior Notes (4.00% interest, maturing June 15, 2028)[43][44] | Senior Notes (In thousands) | Face Value (Dec 31, 2020) | Fair Value (Dec 31, 2020) | Face Value (Sep 30, 2020) | Fair Value (Sep 30, 2020) | | :-------------------------- | :------------------------ | :------------------------ | :------------------------ | :------------------------ | | The 2018 Senior Notes | $400,000 | $452,000 | $400,000 | $442,000 | | The 2019 Senior Notes | $350,000 | $364,000 | $350,000 | $358,750 | | Total | $750,000 | $816,000 | $750,000 | $800,750 | 8. Income Taxes This note explains FICO's effective income tax rates and unrecognized tax benefits | Metric | Quarter Ended Dec 31, 2020 | Quarter Ended Dec 31, 2019 | | :----- | :------------------------- | :------------------------- | | Effective income tax rate | 1.7% | (31.1)% | - The effective tax rates were impacted by excess tax benefits from stock awards, with a significantly larger increase in stock price for awards vested in December 2019 compared to December 2020[48] - Unrecognized tax benefits for uncertain tax positions were $9.0 million at December 31, 2020, up from $8.0 million at September 30, 2020[50] 9. Stock-Based Employee Benefit Plans This note describes FICO's equity award plans and provides details on stock options and restricted stock units - FICO maintains the 2012 Long-Term Incentive Plan for equity awards (stock options, restricted stock units, performance share units, market share units) and the 2019 Employee Stock Purchase Plan[51] | Stock Options (In thousands) | Outstanding at Sep 30, 2020 | Granted | Outstanding at Dec 31, 2020 | | :--------------------------- | :-------------------------- | :------ | :-------------------------- | | Shares | 246 | 12 | 258 | | Weighted-average Exercise Price | $166.80 | $506.91 | $182.79 | | Restricted Stock Units (In thousands) | Outstanding at Sep 30, 2020 | Granted | Released | Forfeited | Outstanding at Dec 31, 2020 | | :------------------------------------ | :-------------------------- | :------ | :------- | :-------- | :-------------------------- | | Shares | 721 | 159 | (273) | (19) | 588 | | Weighted-average Grant-date Fair Value | $229.10 | $506.38 | $187.57 | $241.04 | $323.15 | 10. Earnings per Share This note presents FICO's net income and weighted-average shares used to calculate basic and diluted earnings per share | Metric (In thousands, except per share data) | Quarter Ended Dec 31, 2020 | Quarter Ended Dec 31, 2019 | | :------------------------------------------- | :------------------------- | :------------------------- | | Net income | $86,492 | $54,921 | | Basic weighted-average shares | 29,127 | 29,025 | | Diluted weighted-average shares | 29,789 | 30,169 | | Basic EPS | $2.97 | $1.89 | | Diluted EPS | $2.90 | $1.82 | 11. Segment Information This note provides financial data for FICO's reportable segments: Applications, Scores, and Decision Management Software - FICO operates in three reportable segments: Applications, Scores, and Decision Management Software[59][63] | Segment Revenues (In thousands) | Quarter Ended Dec 31, 2020 | Quarter Ended Dec 31, 2019 | | :------------------------------ | :------------------------- | :------------------------- | | Applications | $135,361 | $152,178 | | Scores | $144,651 | $115,138 | | Decision Management Software | $32,402 | $31,188 | | Total segment revenues | $312,414 | $298,504 | | Segment Operating Income (Loss) (In thousands) | Quarter Ended Dec 31, 2020 | Quarter Ended Dec 31, 2019 | | :--------------------------------------------- | :------------------------- | :------------------------- | | Applications | $35,502 | $36,168 | | Scores | $123,025 | $97,426 | | Decision Management Software | $(14,818) | $(19,457) | | Unallocated Corporate Expenses | $(30,253) | $(34,210) | | Total segment operating income | $113,456 | $79,927 | 12. Contract Balances and Performance Obligations This note details FICO's contract balances, including receivables and deferred revenues, and remaining performance obligations | Receivables (In thousands) | December 31, 2020 | September 30, 2020 | | :------------------------- | :---------------- | :----------------- | | Billed | $187,071 | $211,776 | | Unbilled | $178,839 | $181,550 | | Net receivables | $361,192 | $388,254 | | Short-term receivables | $310,626 | $334,180 | | Deferred Revenues (In thousands) | Quarter Ended Dec 31, 2020 | | :------------------------------- | :------------------------- | | Deferred revenues at Sep 30, 2020 | $122,141 | | Revenue recognized from beginning balance | $(47,793) | | Increases due to billings | $48,441 | | Deferred revenues at Dec 31, 2020 | $122,789 | - Revenue allocated to remaining performance obligations was $337.7 million as of December 31, 2020, with approximately 50% expected to be recognized over the next 20 months[80] 13. Contingencies This note addresses FICO's involvement in legal disputes and the accounting for potential losses - FICO is involved in disputes with customers, claims from former employees, and other legal actions in the ordinary course of business[81] - Litigation accruals are recorded for probable and estimable losses; for reasonable possibility of loss, no material aggregate exposure is determined[81] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's analysis of FICO's financial condition, operational results, and key performance drivers FORWARD LOOKING STATEMENTS This section cautions readers about forward-looking statements and the inherent risks and uncertainties - The report contains forward-looking statements subject to risks and uncertainties, including the impact of COVID-19, which may cause actual results to differ materially[84] - Readers are cautioned to review risk factors described in this and other SEC filings[84] OVERVIEW This section provides a high-level summary of FICO's business, strategic initiatives, and key financial highlights for the period - FICO uses predictive analytics and decision management systems to automate and improve business decisions, serving thousands of companies in over 100 countries[86] | Metric | Quarter Ended Dec 31, 2020 | Quarter Ended Dec 31, 2019 | YoY Change | | :----- | :------------------------- | :------------------------- | :--------- | | Total Revenue | $312.4 million | $298.5 million | +5% | | Scores Revenue | $144.7 million | $115.1 million | +26% | | Applications and Decision Management Software Revenue | $167.8 million | $183.4 million | -9% | | Operating Income | $94.7 million | $51.9 million | +83% | | Net Income | $86.5 million | $54.9 million | +57% | - The company completed a transition to bundled software subscription contracts, shifting revenue recognition timing and expecting a negative impact on recognized term software license revenue in fiscal 2021, but no negative impact on cash flows[89] - FICO sold cyber risk score operations and certain Applications and Decision Management Software assets to an affiliated joint venture in China, exiting less strategic areas to invest in higher-value ones[91] - The company repurchased approximately 101,000 shares for $50.0 million, with $174.8 million remaining under the stock repurchase program[92] COVID-19 Update This section discusses FICO's response to the COVID-19 pandemic and its uncertain impact on future financial results - FICO's focus remains on employee health and safety, customer service, and business continuity amidst the COVID-19 pandemic[93] - The full impact of COVID-19 on future results, financial condition, liquidity, and cash flows remains uncertain due to evolving factors[93] Bookings This section presents booking metrics as an indicator of future revenue, including contract values and terms - Bookings, representing contracts signed that generate current and future revenue, are an important indicator of future revenues, though not a substitute for revenue analysis[94] | Metric | Quarter Ended Dec 31, 2020 | Quarter Ended Dec 31, 2019 | | :----- | :------------------------- | :------------------------- | | Bookings (in millions) | $68.1 | $112.1 | | Bookings Yield | 13% | 14% | | Number of Bookings over $1 Million | 11 | 25 | | Weighted-Average Term (Months) | 36 | 39 | - Transactional and maintenance bookings increased to 67% of total bookings in Q4 2020 from 37% in Q4 2019, while professional services and license bookings decreased[104] RESULTS OF OPERATIONS This section analyzes FICO's financial performance, focusing on revenue and expense trends across segments Revenues This section details FICO's revenue performance by segment, highlighting key drivers and changes | Segment Revenues (In thousands) | Quarter Ended Dec 31, 2020 | Quarter Ended Dec 31, 2019 | Period-to-Period Change | Period-to-Period Percentage Change | | :------------------------------ | :------------------------- | :------------------------- | :---------------------- | :--------------------------------- | | Applications | $135,361 | $152,178 | $(16,817) | (11)% | | Scores | $144,651 | $115,138 | $29,513 | 26% | | Decision Management Software | $32,402 | $31,188 | $1,214 | 4% | | Total | $312,414 | $298,504 | $13,910 | 5% | - Applications revenue decreased primarily due to a $12.8 million decrease in fraud solutions, attributed to the shift in revenue recognition for term license subscription sales and fewer new/renewed deals[108] - Scores revenue increased by $29.5 million, driven by a $16.8 million increase in business-to-business scores (higher mortgage volumes, higher unit price in unsecured originations) and a $12.7 million increase in business-to-consumer services[108] - Decision Management Software revenue increased by $1.2 million, mainly from higher SaaS subscription revenue, partially offset by lower license revenue[111] Operating Expenses and Other Income / Expenses This section analyzes FICO's operating expenses and other income/expenses, explaining period-over-period changes | Operating Expenses (In thousands) | Quarter Ended Dec 31, 2020 | Quarter Ended Dec 31, 2019 | Period-to-Period Change | Period-to-Period Percentage Change | | :-------------------------------- | :------------------------- | :------------------------- | :---------------------- | :--------------------------------- | | Cost of revenues | $89,528 | $90,758 | $(1,230) | (1)% | | Research and development | $40,651 | $38,943 | $1,708 | 4% | | Selling, general and administrative | $93,911 | $112,021 | $(18,110) | (16)% | | Amortization of intangible assets | $937 | $1,796 | $(859) | (48)% | | Restructuring and impairment charges | — | $3,104 | $(3,104) | (100)% | | Gain on sale of product line assets | $(7,334) | — | $(7,334) | —% | | Total operating expenses | $217,693 | $246,622 | $(28,929) | (12)% | - Cost of revenues decreased due to reduced travel from COVID-19, partially offset by increased third-party data costs[115] - Selling, general and administrative expenses decreased significantly due to lower travel, marketing costs, non-capitalizable commissions, and labor/personnel costs from strategic cost initiatives[119] - A $7.3 million gain on sale of product line assets was recognized from the divestiture of cyber risk score operations and certain Applications and Decision Management Software assets[124] - Other income (expense), net increased by $3.1 million, primarily due to decreased foreign currency exchange losses and increased net unrealized gains on the supplemental retirement and savings plan[127] Operating Income This section examines FICO's operating income by segment and overall, detailing the factors influencing changes | Segment Operating Income (Loss) (In thousands) | Quarter Ended Dec 31, 2020 | Quarter Ended Dec 31, 2019 | Period-to-Period Change | Period-to-Period Percentage Change | | :--------------------------------------------- | :------------------------- | :------------------------- | :---------------------- | :--------------------------------- | | Applications | $35,502 | $36,168 | $(666) | (2)% | | Scores | $123,025 | $97,426 | $25,599 | 26% | | Decision Management Software | $(14,818) | $(19,457) | $4,639 | (24)% | | Corporate expenses | $(30,253) | $(34,210) | $3,957 | (12)% | | Total segment operating income | $113,456 | $79,927 | $33,529 | 42% | | Operating income (Total) | $94,721 | $51,882 | $42,839 | 83% | - The 83% increase in total operating income was driven by a $15.6 million decrease in segment operating expenses, a $13.9 million increase in segment revenues, a $7.3 million gain on asset sales, and a $4.0 million decrease in corporate expenses[132] - Scores segment operating income increased by $25.6 million due to higher revenue, while Decision Management Software segment operating loss decreased by $4.6 million due to lower expenses and higher revenue[133] CAPITAL RESOURCES AND LIQUIDITY This section discusses FICO's financial resources, liquidity position, and management's outlook on funding requirements Outlook This section provides FICO's perspective on its cash position and ability to meet future capital and working capital needs - As of December 31, 2020, FICO had $144.7 million in cash and cash equivalents, with $97.7 million held by foreign subsidiaries[139] - Management believes current cash, available credit, and anticipated operating cash flows will be sufficient to fund working capital and other capital requirements[139] - The company does not foresee a need to repatriate foreign cash and cash equivalents, which are deemed permanently reinvested[139] Summary of Cash Flows This section summarizes FICO's cash flow activities from operations, investing, and financing | Cash Flows (In thousands) | Quarter Ended Dec 31, 2020 | Quarter Ended Dec 31, 2019 | Period-to-Period Change | | :------------------------ | :------------------------- | :------------------------- | :---------------------- | | Operating activities | $77,947 | $60,365 | $17,582 | | Investing activities | $3,862 | $(9,011) | $12,873 | | Financing activities | $(99,808) | $(48,195) | $(51,613) | | Effect of exchange rate changes on cash | $5,267 | $1,631 | $3,636 | | Increase (decrease) in cash and cash equivalents | $(12,732) | $4,790 | $(17,522) | - Net cash from operating activities increased by $17.5 million, primarily due to a $31.6 million increase in net income[142] - Net cash from investing activities saw a $12.9 million change, driven by $8.3 million in proceeds from asset sales and a $3.5 million decrease in property and equipment purchases[143] - Net cash used in financing activities increased by $51.6 million, mainly due to a $350.0 million decrease in senior note proceeds, partially offset by reduced revolving line of credit payments and common stock repurchases[144] Repurchases of Common Stock This section details FICO's common stock repurchase program and shares bought back during the quarter - In July 2020, the Board approved an open-ended stock repurchase program for up to $250.0 million[146] - During the quarter ended December 31, 2020, FICO repurchased approximately 101,000 shares for $50.0 million[147] Revolving Line of Credit This section describes FICO's revolving credit facility, its outstanding balance, and compliance with covenants - FICO has a $400 million unsecured revolving line of credit, expiring May 8, 2023, used for working capital, general corporate purposes, debt refinancing, acquisitions, and stock repurchases[148] - As of December 31, 2020, $131.0 million was outstanding at a weighted-average interest rate of 1.284%, with compliance to all financial covenants[148] Senior Notes This section outlines FICO's senior notes, their carrying value, and compliance with financial covenants - The company has 2018 Senior Notes ($400 million, 5.25%, maturing May 15, 2026) and 2019 Senior Notes ($350 million, 4.00%, maturing June 15, 2028)[149] - As of December 31, 2020, the carrying value of Senior Notes was $750.0 million, and FICO was in compliance with all financial covenants[149] Off-Balance Sheet Arrangements This section confirms the absence of material off-balance sheet arrangements impacting FICO's financial condition - FICO does not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on its financial condition or results of operations[150] CRITICAL ACCOUNTING POLICIES AND ESTIMATES This section describes FICO's key accounting policies and estimates that require significant management judgment Revenue Recognition This section explains FICO's policies for recognizing revenue from various contract types and performance obligations - Revenue is primarily from term/perpetual software/scoring licenses, maintenance, SaaS subscriptions, consumer scoring/monitoring, and professional services[154] - For contracts with multiple performance obligations, transaction price is allocated based on relative standalone selling price (SSP)[154] - Significant judgment is required to determine if products/services are distinct, to determine SSPs, and to estimate progress for fixed-price professional services[159][160][161] Capitalized Commission Costs This section details FICO's accounting policy for capitalizing and amortizing incremental commission costs - Incremental commission fees for obtaining customer contracts are capitalized and amortized on a straight-line basis over ten years[162] - Costs with an amortization period of one year or less are expensed as incurred[163] Business Combinations This section outlines FICO's accounting for business combinations, including valuation of acquired assets and liabilities - Acquired assets and assumed liabilities are recognized at acquisition-date fair values, with goodwill as the excess of consideration transferred[164] - Significant estimates and assumptions are required for valuing intangible assets, contractual obligations, and pre-acquisition contingencies[165] - Changes in estimates for uncertain tax positions and tax-related valuation allowances after the measurement period affect income tax provision[168] Goodwill, Acquisition Intangibles and Other Long-Lived Assets - Impairment Assessment This section describes FICO's policies for assessing impairment of goodwill and other long-lived assets - Goodwill is assessed for impairment annually using a qualitative 'step zero' approach, or a two-step quantitative test if impairment is more likely than not[169] - For fiscal 2018, 2019, and 2020, a qualitative analysis concluded that goodwill was not impaired for any reporting units[170] - Finite-lived intangible assets and other long-lived assets are assessed for impairment when indicators exist, using undiscounted cash flows[171] Share-Based Compensation This section explains FICO's accounting for stock-based compensation and the valuation assumptions used - Stock-based compensation cost is measured at grant date fair value and recognized as expense over the vesting period[174] - Valuation models (Black-Scholes, Monte Carlo) require assumptions on stock price volatility, dividend yield, turnover rates, and exercise behaviors[174] Income Taxes This section details FICO's policies for income tax estimation and recognition of uncertain tax positions - Income taxes are estimated based on various jurisdictions, involving significant judgment in determining the provision and assessing deferred tax asset realization[175] - Benefits for uncertain tax positions are recognized using a two-step approach: likelihood of sustainment and measurement of the largest likely realized amount[176] Contingencies and Litigation This section describes FICO's approach to assessing and accounting for potential losses from legal proceedings - FICO assesses the likelihood and potential range of probable losses for various legal proceedings, lawsuits, and claims[179] - Accruals are made for probable and estimable losses; disclosures are considered for less probable or unestimable amounts[179] New Accounting Pronouncements This section discusses the adoption of new accounting standards and their impact on FICO's financial statements - FICO adopted ASU 2018-15 (Internal-Use Software) and Topic 326 (Credit Losses) in Q1 fiscal 2021, with no significant impact on condensed consolidated financial statements[180][181] - No recently issued accounting pronouncements are expected to have a significant effect on financial statements[26][184] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section details FICO's exposure to market risks, including interest and foreign exchange rates, and risk management strategies Market Risk Disclosures This section outlines FICO's exposure to market risks, particularly interest rate and foreign exchange rate fluctuations - FICO is exposed to market risk from changes in interest rates and foreign exchange rates, but does not use derivative financial instruments for speculative purposes[182] Interest Rate This section details FICO's exposure to interest rate risk, affecting cash equivalents and variable-rate debt | Metric (Dollars in thousands) | December 31, 2020 Basis Cost | December 31, 2020 Carrying Amount | December 31, 2020 Average Yield | | :---------------------------- | :--------------------------- | :-------------------------------- | :------------------------------ | | Cash and cash equivalents | $144,662 | $144,662 | 0.05% | - The fair value of Senior Notes (2018 and 2019) may fluctuate due to market interest rates and economic conditions[187] - The revolving line of credit has variable interest rates, impacting interest incurred and cash flows but not the fair value of the instrument[188] Foreign Currency Forward Contracts This section describes FICO's use of foreign currency forward contracts to mitigate exchange rate risk - FICO uses foreign currency forward contracts to manage foreign exchange rate risk on foreign-currency-denominated receivable and cash balances[189] - These contracts have maturity periods of less than three months and mitigate foreign exchange rate risk by offsetting changes in remeasured asset values[189] | Foreign Currency Forward Contracts (In thousands) | Contract Amount (Dec 31, 2020) | USD (Dec 31, 2020) | Fair Value (Dec 31, 2020) | | :------------------------------------------------ | :----------------------------- | :----------------- | :------------------------ | | Sell Euro (EUR) | EUR 18,900 | $23,068 | $0 | | Buy British pound (GBP) | GBP 12,034 | $16,400 | $0 | | Buy Singapore dollar (SGD) | SGD 6,725 | $5,100 | $0 | Item 4. Controls and Procedures This section confirms the effectiveness of FICO's disclosure controls and reports no material changes in internal control over financial reporting Evaluation of Disclosure Controls and Procedures This section confirms the effectiveness of FICO's disclosure controls and procedures as evaluated by management - FICO's management, including the CEO and CFO, concluded that disclosure controls and procedures were effective as of December 31, 2020[192] - These controls ensure timely and accurate recording, processing, summarizing, and reporting of information required under the Exchange Act[192] Changes in Internal Control over Financial Reporting This section reports no material changes in FICO's internal control over financial reporting during the quarter - No changes in internal control over financial reporting materially affected, or are reasonably likely to materially affect, FICO's internal control over financial reporting during the quarter[193] PART II – OTHER INFORMATION This part provides additional information on legal proceedings, risk factors, equity sales, and other disclosures Item 1. Legal Proceedings This section reports on legal proceedings, noting the closure of a civil antitrust investigation without enforcement action - The U.S. Department of Justice (DOJ) closed its civil investigation into potential exclusionary conduct by FICO on December 8, 2020, with no enforcement action taken[195] Item 1A. Risk Factors This section outlines various risks that could materially affect FICO's business, financial condition, and results of operations Business, Market and Strategy Risks This section details risks related to FICO's business model, market conditions, and strategic initiatives, including COVID-19 impacts - The COVID-19 pandemic has negatively affected FICO's operations and customer spending, with uncertain duration and impact on future revenues and financial performance[196][199] - FICO's Decision Management (DM) strategy, focusing on cloud-native platforms and multiple connectable products, may not be successful if the market is unreceptive, leading to potential volatility in revenues[201][202] - A substantial portion of revenues comes from a few products (scoring, fraud, customer management) and the banking industry (85% in Q4 2020), making FICO vulnerable to market acceptance changes and industry conditions[86][203][205] - Reliance on major credit reporting agencies (Experian, TransUnion, Equifax) and large customers for significant revenue creates bargaining power imbalances and risks from changes in relationships or economic downturns[210][213] - Failure to develop successful new products, keep pace with rapidly changing technologies, or manage product and pricing strategies could harm FICO's business and market share[216][220][221] - Acquisition activities involve risks like disruption, integration difficulties, and failure to realize financial goals, while strategic divestitures may not provide anticipated business benefits[229][233] Operational Risks This section outlines risks associated with FICO's internal operations, including cybersecurity, IT systems, and personnel management - Compromised cybersecurity measures or unauthorized access to data could damage FICO's reputation, lead to significant liabilities, and cause customers to cease using products[239][241][242] - Business interruptions or failures of IT and communication systems could adversely affect service availability, reputation, and financial condition[244][245][246] - Failure to recruit and retain qualified personnel, especially in technical and sales roles, could hinder FICO's ability to manage its business and achieve future success[247] - Inability to obtain essential model construction data from customers or other sources due to privacy, security, or regulatory concerns could impair product effectiveness and development[249] Global Operational Risks This section addresses risks stemming from FICO's international operations and global economic conditions - Adverse global economic conditions, including the COVID-19 pandemic, can reduce demand for FICO's products and services, leading to softened demand, longer sales cycles, and increased price competition[250][251][252] - Brexit introduces uncertainties for FICO's U.K. business, potentially affecting labor, goods flow, customer relationships, and creating economic volatility[253] - International operations (32% of revenues in fiscal 2020) expose FICO to risks like political instability, foreign laws, data privacy regulations, currency fluctuations, and difficulties in managing global staff[257][258][259] Legal, Regulatory and Compliance Risks This section covers risks related to legal proceedings, regulatory compliance, and intellectual property - FICO is subject to various U.S. and international laws and regulations (e.g., Fair Credit Reporting Act, GDPR, CCPA) that could expose it to liability, increase expenses, or limit product demand[260][261][264][265] - New or changing legislation, especially regarding consumer protection, privacy, and data security, could negatively impact FICO's business and increase compliance costs[265][267] - Infringement claims related to intellectual property could lead to significant defense costs, damages, or require FICO to cease using or selling certain products[268][269] Financial Risks This section discusses financial risks such as revenue forecasting challenges, sales cycle variability, and acquisition-related charges - Long and variable sales cycles (60 days to 18 months) make accurate revenue forecasting difficult, potentially leading to stock price volatility[270][271] - Revenue-generating transactions concentrated in quarter-end weeks can prevent accurate financial forecasting and cause stock price declines[272][273] - Acquisitions can result in material charges to earnings (e.g., goodwill impairment, amortization, integration costs), adversely affecting operating results and cash flows[275][276][277] General Risk Factors This section includes broader risks affecting FICO's stock price, corporate governance, and tax matters - FICO's stock price is volatile and subject to fluctuations due to variations in revenues, operating results, market analyst expectations, and economic conditions (e.g., COVID-19)[278] - Anti-takeover defenses, such as the board's ability to issue preferred stock, could make it difficult for another company to acquire control, potentially limiting demand or price for FICO's securities[281][282] - Changes in tax laws or adverse outcomes from income tax return examinations could negatively affect FICO's operating results and financial condition[283][284] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds This section details the company's common stock repurchase activities during the quarter ended December 31, 2020 Issuer Purchases of Equity Securities This section details FICO's common stock repurchases, including shares bought under publicly announced programs | Period | Total Number of Shares Purchased (1) | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2) | Value of Shares that May Yet Be Purchased Under the Plans or Programs (2) | | :----- | :----------------------------------- | :--------------------------- | :----------------------------------------------------------------------------------- | :------------------------------------------------------------------------ | | Oct 1 - Oct 31, 2020 | 2,606 | $414.27 | — | $224,777,076 | | Nov 1 - Nov 30, 2020 | 39,698 | $477.20 | 39,618 | $205,860,921 | | Dec 1 - Dec 31, 2020 | 227,868 | $507.55 | 61,532 | $174,777,136 | | Total | 270,172 | $502.19 | 101,150 | $174,777,136 | - The total shares purchased include 169,022 shares delivered for tax withholding obligations from restricted stock unit vesting[285] - The company repurchased 101,150 shares under its July 2020 stock repurchase program, which authorizes up to $250.0 million[285] Item 3. Defaults Upon Senior Securities This item is not applicable to Fair Isaac Corporation for the reported period - This item is not applicable[286] Item 4. Mine Safety Disclosures This item is not applicable to Fair Isaac Corporation for the reported period - This item is not applicable[287] Item 5. Other Information This item is not applicable to Fair Isaac Corporation for the reported period - This item is not applicable[289] Item 6. Exhibits This section lists the exhibits filed as part of the Form 10-Q, including corporate governance documents and certifications - Exhibits include the Composite Restated Certificate of Incorporation, By-laws, CEO/CFO certifications (Rule 13a-14(a)/15d-14(a) and Section 1350), and Inline XBRL documents[291] Signatures This section contains the required signatures for the Form 10-Q filing, confirming its submission by authorized officers - The report was signed by Michael I. McLaughlin, Executive Vice President and Chief Financial Officer, and Michael S. Leonard, Vice President and Chief Accounting Officer, on January 28, 2021[295]