e10vq
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
(Mark One)
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 |
For the quarterly period ended December 31, 2006
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
[NO FEE REQUIRED] |
For
the transition period from _________ to _________
Commission File Number 0-16439
Fair Isaac Corporation
(Exact name of registrant as specified in its charter)
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Delaware
(State or other jurisdiction of
incorporation or organization)
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94-1499887
(I.R.S. Employer
Identification No.) |
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901 Marquette Avenue, Suite 3200
Minneapolis, Minnesota
(Address of principal executive offices)
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55402-3232
(Zip Code) |
Registrants telephone number, including area code:
612-758-5200
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated
filer in Rule 12b-2 of the Exchange Act (Check one):
Large Accelerated Filer þ Accelerated Filer o Non-Accelerated Filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). o Yes þ No
The number of shares of common stock outstanding on January 31, 2007 was 57,118,843 (excluding
31,737,940 shares held by the Company as treasury stock).
PART I FINANCIAL INFORMATION
Item 1. Financial Statements
FAIR ISAAC CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except par value data)
(Unaudited)
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December 31, |
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September 30, |
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2006 |
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2006 |
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Assets |
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Current assets: |
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Cash and cash equivalents |
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$ |
99,149 |
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$ |
75,154 |
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Marketable securities available for sale, current portion |
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122,812 |
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152,141 |
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Receivables, net |
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176,547 |
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165,806 |
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Prepaid expenses and other current assets |
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16,680 |
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17,998 |
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Deferred income taxes |
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2,211 |
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Total current assets |
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415,188 |
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413,310 |
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Marketable securities available for sale, less current portion |
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47,362 |
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38,318 |
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Other investments |
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2,374 |
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2,161 |
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Property and equipment, net |
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54,650 |
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56,611 |
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Goodwill |
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701,068 |
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695,162 |
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Intangible assets, net |
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85,467 |
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90,900 |
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Deferred income taxes |
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17,637 |
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20,010 |
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Other assets |
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4,424 |
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4,733 |
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$ |
1,328,170 |
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$ |
1,321,205 |
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Liabilities and Stockholders Equity |
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Current liabilities: |
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Accounts payable |
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$ |
14,912 |
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$ |
12,162 |
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Senior convertible notes |
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400,000 |
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400,000 |
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Revolving line of credit |
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70,000 |
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Accrued compensation and employee benefits |
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40,567 |
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34,936 |
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Other accrued liabilities |
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41,698 |
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41,647 |
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Deferred revenue |
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47,131 |
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48,284 |
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Total current liabilities |
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614,308 |
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537,029 |
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Other liabilities |
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14,166 |
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14,148 |
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Total liabilities |
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628,474 |
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551,177 |
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Stockholders equity: |
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Preferred stock ($0.01 par value; 1,000 shares authorized; none
issued and outstanding) |
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Common stock ($0.01 par value; 200,000 shares authorized,
88,857 shares issued and 57,004 and 59,369 shares outstanding
at December 31, 2006 and September 30, 2006, respectively) |
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570 |
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594 |
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Paid-in-capital |
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1,077,466 |
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1,073,886 |
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Treasury stock, at cost (31,853 and 29,488 shares at December
31, 2006 and September 30, 2006, respectively) |
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(1,062,725 |
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(952,979 |
) |
Retained earnings |
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674,925 |
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644,836 |
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Accumulated other comprehensive income |
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9,460 |
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3,691 |
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Total stockholders equity |
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699,696 |
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770,028 |
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$ |
1,328,170 |
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$ |
1,321,205 |
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See accompanying notes to condensed consolidated financial statements.
1
FAIR ISAAC CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)
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Quarter Ended |
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December 31, |
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2006 |
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2005 |
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Revenues |
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$ |
208,227 |
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$ |
202,790 |
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Operating expenses: |
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Cost of revenues (1) |
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70,569 |
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67,045 |
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Research and development |
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17,719 |
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22,730 |
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Selling, general and administrative (1) |
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68,648 |
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63,383 |
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Amortization of intangible assets (1) |
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6,390 |
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6,263 |
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Restructuring and acquisition-related |
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(674 |
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Total operating expenses |
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163,326 |
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158,747 |
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Operating income |
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44,901 |
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44,043 |
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Interest income |
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3,564 |
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3,066 |
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Interest expense |
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(2,676 |
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(2,135 |
) |
Other expense, net |
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(453 |
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(86 |
) |
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Income before income taxes |
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45,336 |
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44,888 |
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Provision for income taxes |
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14,111 |
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16,431 |
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Net income |
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$ |
31,225 |
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$ |
28,457 |
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Earnings per share: |
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Basic |
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$ |
0.54 |
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$ |
0.44 |
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Diluted |
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$ |
0.52 |
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$ |
0.43 |
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Shares used in computing earnings per share: |
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Basic |
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58,057 |
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64,211 |
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Diluted |
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59,985 |
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66,219 |
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(1) |
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Cost of revenues and selling, general and administrative expenses exclude the
amortization of intangible assets. See Note 2 to the accompanying condensed
consolidated financial statements. |
See accompanying notes to condensed consolidated financial statements.
2
FAIR ISAAC CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY AND
COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
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Accumulated |
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Common Stock |
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Other |
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Total |
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Par |
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Paid-In- |
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Treasury |
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Retained |
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Comprehensive |
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Stockholders |
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Comprehensive |
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Shares |
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Value |
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Capital |
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Stock |
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Earnings |
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Income |
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Equity |
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Income |
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Balance at September 30, 2006 |
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59,369 |
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$ |
594 |
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$ |
1,073,886 |
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$ |
(952,979 |
) |
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$ |
644,836 |
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$ |
3,691 |
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$ |
770,028 |
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Share-based compensation |
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9,572 |
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9,572 |
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Exercise of stock options |
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1,200 |
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12 |
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(12,859 |
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39,384 |
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26,537 |
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Tax benefit from exercised
stock options |
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7,896 |
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7,896 |
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Repurchases of common stock |
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(3,725 |
) |
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(37 |
) |
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(154,453 |
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(154,490 |
) |
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Issuance of ESPP shares from
treasury |
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140 |
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1 |
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(383 |
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4,677 |
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4,295 |
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Issuance of restricted stock
to employees from treasury |
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20 |
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(646 |
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646 |
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Dividends paid |
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(1,136 |
) |
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(1,136 |
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Net income |
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31,225 |
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31,225 |
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$ |
31,225 |
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Unrealized gains on investments |
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76 |
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|
76 |
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|
76 |
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Cumulative translation
adjustments |
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5,693 |
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5,693 |
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5,693 |
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Balance at December 31, 2006 |
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57,004 |
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$ |
570 |
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$ |
1,077,466 |
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$ |
(1,062,725 |
) |
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$ |
674,925 |
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$ |
9,460 |
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$ |
699,696 |
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$ |
36,994 |
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See accompanying notes to condensed consolidated financial statements.
3
FAIR ISAAC CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
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Quarter Ended |
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December 31, |
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2006 |
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2005 |
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Cash flows from operating activities: |
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Net income |
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$ |
31,225 |
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$ |
28,457 |
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Adjustments to reconcile net income to net cash provided by
operating activities: |
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Depreciation and amortization |
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13,549 |
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12,059 |
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Share-based compensation |
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9,572 |
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|
9,514 |
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Deferred income taxes |
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|
2,375 |
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(3,041 |
) |
Tax benefit from exercised stock options |
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|
7,896 |
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|
6,633 |
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Excess tax benefits from share-based payment arrangements |
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(2,178 |
) |
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(3,647 |
) |
Net amortization (accretion) of premium (discount) on marketable
securities |
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(365 |
) |
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35 |
|
Provision for doubtful accounts |
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1,306 |
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|
368 |
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Changes in operating assets and liabilities, net of acquisition effects: |
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Receivables |
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(10,069 |
) |
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(810 |
) |
Prepaid expenses and other assets |
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|
2,181 |
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|
3,508 |
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Accounts payable |
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2,845 |
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|
2,246 |
|
Accrued compensation and employee benefits |
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|
5,469 |
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|
2,594 |
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Other liabilities |
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(2,349 |
) |
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|
2,272 |
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Deferred revenue |
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(1,809 |
) |
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|
556 |
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Net cash provided by operating activities |
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|
59,648 |
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|
60,744 |
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Cash flows from investing activities: |
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Purchases of property and equipment |
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(5,125 |
) |
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(2,545 |
) |
Collection of note receivable from sale of product line |
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|
249 |
|
Purchases of marketable securities |
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(93,957 |
) |
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(33,273 |
) |
Proceeds from sales of marketable securities |
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|
14,250 |
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|
18,740 |
|
Proceeds from maturities of marketable securities |
|
|
101,099 |
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|
37,120 |
|
Investment in cost-method investee |
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|
(213 |
) |
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Net cash provided by investing activities |
|
|
16,054 |
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|
20,291 |
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Cash flows from financing activities: |
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Proceeds from revolving line of credit |
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|
70,000 |
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Debt issuance costs |
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(408 |
) |
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Proceeds from issuances of common stock under employee
stock option and purchase plans |
|
|
30,832 |
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|
36,154 |
|
Dividends paid |
|
|
(1,136 |
) |
|
|
(1,295 |
) |
Repurchases of common stock |
|
|
(154,490 |
) |
|
|
(12,766 |
) |
Excess tax benefits from share-based payment arrangements |
|
|
2,178 |
|
|
|
3,647 |
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities |
|
|
(53,024 |
) |
|
|
25,740 |
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|
|
Effect of exchange rate changes on cash |
|
|
1,317 |
|
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|
(359 |
) |
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|
Increase in cash and cash equivalents |
|
|
23,995 |
|
|
|
106,416 |
|
Cash and cash equivalents, beginning of period |
|
|
75,154 |
|
|
|
82,880 |
|
|
|
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Cash and cash equivalents, end of period |
|
$ |
99,149 |
|
|
$ |
189,296 |
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Supplemental disclosures of cash flow information: |
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|
Cash paid for income taxes, net |
|
$ |
3,003 |
|
|
$ |
9,050 |
|
See accompanying notes to condensed consolidated financial statements.
4
FAIR ISAAC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1. Nature of Business
Fair Isaac Corporation
Incorporated under the laws of the State of Delaware, Fair Isaac Corporation is a provider of
analytic, software and data management products and services that enable businesses to automate and
improve decisions. Fair Isaac Corporation provides a range of analytical solutions, credit scoring
and credit account management products and services to banks, credit reporting agencies, credit
card processing agencies, insurers, retailers, telecommunications providers, healthcare
organizations and government agencies.
In these condensed consolidated financial statements, Fair Isaac Corporation is referred to as
we, us, our, and Fair Isaac.
Principles of Consolidation and Basis of Presentation
We have prepared the accompanying unaudited interim condensed consolidated financial
statements in accordance with the instructions to Form 10-Q and the standards of accounting
measurement set forth in Accounting Principles Board (APB) Opinion No. 28 and any amendments
thereto adopted by the Financial Accounting Standards Board (FASB). Consequently, we have not
necessarily included in this Form 10-Q all information and footnotes required for audited financial
statements. In our opinion, the accompanying unaudited interim condensed consolidated financial
statements in this Form 10-Q reflect all adjustments (consisting only of normal recurring
adjustments, except as otherwise indicated) necessary for a fair presentation of our financial
position and results of operations. These unaudited condensed consolidated financial statements and
notes thereto should be read in conjunction with our audited consolidated financial statements and
notes thereto presented in our Annual Report on Form 10-K for the year ended September 30, 2006.
The interim financial information contained in this report is not necessarily indicative of the
results to be expected for any other interim period or for the entire fiscal year.
The condensed consolidated financial statements include the accounts of Fair Isaac and its
subsidiaries. All intercompany accounts and transactions have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting
principles requires management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the
financial statements and the reported amounts of revenues and expenses during the reporting
periods. Actual results could differ from those estimates. These estimates and assumptions include,
but are not limited to, assessing the following: the recoverability of accounts receivable,
goodwill and other intangible assets, software development costs and deferred tax assets; estimated
losses associated with contingencies and litigation; the ability to estimate hours in connection
with fixed-fee service contracts, the ability to estimate transactional-based revenues for which
actual transaction volumes have not yet been received, the determination of whether fees are fixed
or determinable and collection is probable or reasonably assured; and the development of
assumptions for use in the Black-Scholes model that estimates the fair value of our share-based
awards and assessing forfeiture rates of share-based awards.
2. Amortization of Intangible Assets
Amortization expense associated with our intangible assets, which has been reflected as a
separate operating expense caption within the accompanying condensed consolidated statements of
income, consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended |
|
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
|
(In thousands) |
|
|
|
|
|
|
|
|
|
|
Cost of revenues |
|
$ |
3,779 |
|
|
$ |
3,714 |
|
Selling, general and administrative |
|
|
2,611 |
|
|
|
2,549 |
|
|
|
|
|
|
|
|
|
|
$ |
6,390 |
|
|
$ |
6,263 |
|
|
|
|
|
|
|
|
5
FAIR ISAAC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Cost of revenues reflects our amortization of completed technology, and selling, general and
administrative expenses reflects our amortization of other intangible assets. Intangible assets
were $85.5 million and $90.9 million, net of accumulated amortization of $91.3 million and $84.5
million, as of December 31, 2006 and September 30, 2006, respectively.
3. Restructuring and Acquisition-Related Expenses
The following table summarizes our restructuring and acquisition-related accruals associated
with our fiscal 2005 Braun Consulting, Inc. acquisition, fiscal 2004 London Bridge Software
Holdings plc acquisition, and certain other Fair Isaac facility closures. The current portion and
non-current portion is recorded in other accrued current liabilities and other long-term
liabilities within the accompanying condensed consolidated balance sheets.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrual at |
|
|
|
|
|
|
Accrual at |
|
|
|
September 30, |
|
|
Cash |
|
|
December 31, |
|
|
|
2006 |
|
|
Payments |
|
|
2006 |
|
|
|
(In thousands) |
|
Facilities charges |
|
$ |
15,094 |
|
|
$ |
(1,005 |
) |
|
$ |
14,089 |
|
Employee separation |
|
|
90 |
|
|
|
(90 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,184 |
|
|
$ |
(1,095 |
) |
|
|
14,089 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Less: current portion |
|
|
(6,161 |
) |
|
|
|
|
|
|
(5,602 |
) |
|
|
|
|
|
|
|
|
|
|
|
Non-current |
|
$ |
9,023 |
|
|
|
|
|
|
$ |
8,487 |
|
|
|
|
|
|
|
|
|
|
|
|
4. Share-Based Payment
We maintain the 1992 Long-term Incentive Plan (the 1992 Plan) under which we may grant stock
options, stock appreciation rights, restricted stock, restricted stock units and common stock to
officers, key employees and non-employee directors. Under the 1992 Plan, a number of shares equal
to 4% of the number of shares of Fair Isaac common stock outstanding on the last day of the
preceding fiscal year is added to the shares available under this plan each fiscal year, provided
that the number of shares for grants of incentive stock options for the remaining term of this plan
shall not exceed 5,062,500 shares. The 1992 Plan will terminate in February 2012. In November
2003, our Board of Directors approved the adoption of the 2003 Employment Inducement Award Plan
(the 2003 Plan). The 2003 Plan reserves 2,250,000 shares of common stock solely for the granting
of inducement stock options and other awards, as defined, that meet the employment inducement
award exception to the New York Stock Exchanges listing standards requiring shareholder approval
of equity-based inducement incentive plans. Except for the employment inducement award criteria,
awards under the 2003 Plan will be generally consistent with those made under our 1992 Plan. The
2003 Plan shall remain in effect until terminated by the Board of Directors. We also maintain
individual stock option plans for certain of our executive officers and the chairman of the board.
Stock option awards granted during typically have a maximum term of seven years and vest ratably
over four years. Stock option awards granted prior to October 1, 2005, typically had a maximum
term of ten years and vest ratably over four years.
Under our 1999 Employee Stock Purchase Plan, we are authorized to issue up to 5,062,500 shares
of common stock to eligible employees. Employees may have up to 10% of their base salary withheld
through payroll deductions to purchase Fair Isaac common stock during semi-annual offering periods.
The purchase price of the stock is the lower of 85% of (i) the fair market value of the common
stock on the enrollment date (the first day of the offering period), or (ii) the fair market value
on the exercise date (the last day of each offering period). Offering period means approximately
six-month periods commencing (a) on the first trading day on or after January 1 and terminating on
the last trading day in the following June, and (b) on the first trading day on or after July 1 and
terminating on the last trading day in the following December.
We estimate the fair value of options granted using the Black-Scholes option valuation model.
We estimate the volatility of our common stock at the date of grant based on a combination of the
implied volatility of publicly traded options on our common stock and our historical volatility
rate, consistent with Statement of Financial Accounting Standards (SFAS) No. 123(R), Share-Based
Payment and Securities and Exchange Commission Staff Accounting Bulletin No. 107 (SAB 107). Our
decision to use implied volatility was based upon the availability of actively traded options on our common stock and
our assessment that implied volatility is more representative of future stock price trends than
historical volatility. We estimate expected term consistent with the simplified method identified
in SAB 107 for share-based awards. We elected to use the simplified method as we changed the
contractual life for share-based awards from ten to seven years starting in fiscal 2006. The
simplified method calculates the expected term as the average of the vesting and contractual terms
of the award. Previously, we estimated expected term based on historical exercise patterns. The
6
FAIR ISAAC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
dividend yield assumption is based on historical dividend payouts. The risk-free interest
rate assumption is based on observed interest rates appropriate for the term of our employee
options. We use historical data to estimate pre-vesting option forfeitures and record share-based
compensation expense only for those awards that are expected to vest. For options granted, we
amortize the fair value on a straight-line basis over the vesting period of the options.
The following table summarizes option activity during the quarter ended December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
Weighted- |
|
|
|
|
|
|
|
|
|
|
average |
|
|
Average |
|
|
Aggregate |
|
|
|
|
|
|
|
Exercise |
|
|
Remaining |
|
|
Intrinsic |
|
|
|
Shares |
|
|
Price |
|
|
Contractual Term |
|
|
Value |
|
|
|
(In thousands) |
|
|
|
|
|
|
|
|
|
|
(In thousands) |
|
|
Outstanding at October 1, 2006 |
|
|
13,785 |
|
|
$ |
32.25 |
|
|
|
|
|
|
|
|
|
Granted |
|
|
758 |
|
|
|
41.39 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
(1,200 |
) |
|
|
22.12 |
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
(391 |
) |
|
|
39.20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2006 |
|
|
12,952 |
|
|
|
33.52 |
|
|
|
6.06 |
|
|
$ |
95,341 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The fair value of restricted stock units is based on the fair market value of our common stock
on the date of grant. We use historical data to estimate pre-vesting forfeitures and record
share-based compensation expense only for those awards that are expected to vest. Share-based
compensation expense for restricted stock units is recognized on a straight-line basis over the
vesting period. Upon vesting, restricted stock units will convert into an equivalent number of
shares of common stock.
The following table summarizes restricted stock unit activity during the quarter ended
December 31, 2006:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
average |
|
|
Shares |
|
Price |
|
|
(In thousands) |
|
|
|
|
Outstanding at October 1, 2006 |
|
|
|
|
|
$ |
|
|
Granted |
|
|
231 |
|
|
|
41.74 |
|
Released |
|
|
|
|
|
|
|
|
Forfeited |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2006 |
|
|
231 |
|
|
|
41.74 |
|
|
|
|
|
|
|
|
|
|
5. Earnings Per Share
The following reconciles the numerators and denominators of basic and diluted earnings per
share (EPS):
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended |
|
|
|
December 31, |
|
|
|
2006 |
|
|
2005 |
|
|
|
(In thousands, except per |
|
|
|
share data) |
|
Numerator for basic earnings per share net income |
|
$ |
31,225 |
|
|
$ |
28,457 |
|
Interest expense on senior convertible notes, net of tax |
|
|
1 |
|
|
|
1 |
|
|
|
|
|
|
|
|
Numerator for diluted earnings per share |
|
$ |
31,226 |
|
|
$ |
28,458 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator shares: |
|
|
|
|
|
|
|
|
Basic weighted-average shares |
|
|
58,057 |
|
|
|
64,211 |
|
Effect of dilutive securities |
|
|
1,928 |
|
|
|
2,008 |
|
|
|
|
|
|
|
|
Diluted weighted-average shares |
|
|
59,985 |
|
|
|
66,219 |
|
|
|
|
|
|
|
|
Earnings per share: |
|
|
|
|
|
|
|
|
Basic |
|
$ |
0.54 |
|
|
$ |
0.44 |
|
|
|
|
|
|
|
|
Diluted |
|
$ |
0.52 |
|
|
$ |
0.43 |
|
|
|
|
|
|
|
|
7
FAIR ISAAC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The computation of diluted EPS for the quarters ended December 31, 2006 and 2005, excludes
options to purchase approximately 3,419,146 and 648,000 shares of common stock, respectively,
because the options exercise prices exceeded the average market price of our common stock in these
periods and their inclusion would be antidilutive.
6. Segment Information
We are organized into the following four reportable segments, to align with the internal
management of our worldwide business operations based on product and service offerings:
|
|
|
Strategy Machine Solutions. These are pre-configured Enterprise Decision
Management (EDM) applications designed for a specific type of business problem or process,
such as marketing, account origination, customer management, fraud and medical bill review.
This segment also includes our myFICO solutions for consumers. |
|
|
|
|
Scoring Solutions. Our scoring solutions give our clients access to analytics that can
be easily integrated into their transaction streams and decision-making processes. Our
scoring solutions are distributed through major credit reporting agencies, as well as
services through which we provide our scores to lenders directly. |
|
|
|
|
Professional Services. Through our professional services, we tailor our EDM products to
our clients environments, and we design more effective decisioning environments for our
clients. This segment includes revenues from custom engagements, business solution and
technical consulting services, systems integration services, and data management services. |
|
|
|
|
Analytic Software Tools. This segment is composed of software tools that clients can use
to create their own custom EDM applications. |
Our Chief Executive Officer evaluates segment financial performance based on segment revenues
and operating income. Segment operating expenses consist of direct and indirect costs principally
related to personnel, facilities, consulting, travel, depreciation and amortization. Indirect
costs are allocated to the segments generally based on relative segment revenues, fixed rates
established by management based upon estimated expense contribution levels and other assumptions
that management considers reasonable. We do not allocate share-based compensation expense,
restructuring and acquisition-related expense and certain other income and expense measures to our
segments. These income and expense items are not allocated because they are not considered in
evaluating the segments operating performance. Our Chief Executive Officer does not evaluate the
financial performance of each segment based on its respective assets or capital expenditures;
rather, depreciation and amortization amounts are allocated to the segments from their internal
cost centers as described above.
The following tables summarize segment information for the quarters ended December 31, 2006
and 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended December 31, 2006 |
|
|
|
Strategy |
|
|
|
|
|
|
|
|
|
|
Analytic |
|
|
|
|
|
|
Machine |
|
|
Scoring |
|
|
Professional |
|
|
Software |
|
|
|
|
|
|
Solutions |
|
|
Solutions |
|
|
Services |
|
|
Tools |
|
|
Total |
|
|
|
(In thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
110,669 |
|
|
$ |
44,918 |
|
|
$ |
38,417 |
|
|
$ |
14,223 |
|
|
$ |
208,227 |
|
Operating expenses |
|
|
(90,806 |
) |
|
|
(16,039 |
) |
|
|
(34,969 |
) |
|
|
(11,940 |
) |
|
|
(153,754 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income |
|
$ |
19,863 |
|
|
$ |
28,879 |
|
|
$ |
3,448 |
|
|
$ |
2,283 |
|
|
|
54,473 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unallocated share-based
compensation expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,572 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
44,901 |
|
Unallocated interest income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,564 |
|
Unallocated interest expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,676 |
) |
Unallocated other expense, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(453 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
45,336 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
$ |
8,410 |
|
|
$ |
2,225 |
|
|
$ |
1,980 |
|
|
$ |
934 |
|
|
$ |
13,549 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8
FAIR ISAAC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter December 31, 2005 |
|
|
|
Strategy |
|
|
|
|
|
|
|
|
|
|
Analytic |
|
|
|
|
|
|
Machine |
|
|
Scoring |
|
|
Professional |
|
|
Software |
|
|
|
|
|
|
Solutions |
|
|
Solutions |
|
|
Services |
|
|
Tools |
|
|
Total |
|
|
|
(In thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
111,986 |
|
|
$ |
46,156 |
|
|
$ |
32,831 |
|
|
$ |
11,817 |
|
|
$ |
202,790 |
|
Operating expenses |
|
|
(91,366 |
) |
|
|
(16,622 |
) |
|
|
(30,913 |
) |
|
|
(11,006 |
) |
|
|
(149,907 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income |
|
$ |
20,620 |
|
|
$ |
29,534 |
|
|
$ |
1,918 |
|
|
$ |
811 |
|
|
|
52,883 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unallocated share-based
compensation expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,514 |
) |
Unallocated restructuring and
acquisition-related |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
674 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
44,043 |
|
Unallocated interest income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,066 |
|
Unallocated interest expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,135 |
) |
Unallocated other expense, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(86 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
44,888 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
$ |
7,909 |
|
|
$ |
1,985 |
|
|
$ |
1,389 |
|
|
$ |
776 |
|
|
$ |
12,059 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7. Income Taxes
Our effective tax rate was 31.1% and 36.6% during the quarters ended December 31, 2006 and
2005, respectively. The provision for income taxes during interim quarterly reporting periods is
based on our estimates of the effective tax rates for the respective full fiscal year. Income tax
expense in the quarter ended December 31, 2006, included a benefit of $1.8 million related to a
favorable settlement of a state tax examination. In addition, income tax expense was reduced by
$0.5 million as a result of the recognition of U.S federal research tax credits related to fiscal
2006. We were unable to recognize these credits during the last nine months of fiscal 2006 as
legislation providing for this credit had expired. In December 2006, legislation was enacted that
provided for retroactive extension of this credit.
8. Credit Agreement
In October 2006, we entered into a five-year $300 million unsecured revolving credit facility
with a syndicate of banks. The credit facility may be increased to $500 million subject to certain
terms and conditions. Proceeds from the credit facility can be used for capital requirements and
general business purposes and may be used for the refinancing of existing debt, acquisitions and
repurchases of our common stock. Interest on amounts borrowed under the credit facility is based on (i)
a base rate, which is the greater of (a) the prime rate and (b) the Federal Funds rate plus 0.50%
or (ii) LIBOR plus an applicable margin. The margin on LIBOR borrowings ranges from 0.30% to 0.55%
and is determined based on our consolidated leverage ratio. In addition, we must pay utilization
fees if borrowings and commitments under the credit facility exceed 50% of the total credit
facility commitment, as well as facility fees. The credit facility contains certain restrictive
covenants, including maintenance of consolidated leverage and fixed charge coverage ratios. The
credit facility contains other covenants typical of unsecured facilities. As of December 31, 2006,
we had $70.0 million of borrowings outstanding under the credit facility at an average interest
rate of 5.675%.
9. Contingencies
We are in disputes with certain customers regarding amounts owed in connection with the sale
of certain of our products and services. We also have had claims asserted by former employees
relating to compensation and other employment matters. We are also involved in various other
claims and legal actions arising in the ordinary course of business. We believe that none of these
aforementioned claims or actions will result in a material adverse impact to our consolidated
results of operations, liquidity or financial condition. However, the amount or range of any
potential liabilities associated with these claims and actions, if any, cannot be determined with
certainty. Set forth below is additional detail concerning certain ongoing litigation.
Customer Claims
We are party to two separate lawsuits involving two different customers who have asserted that
our performance under professional services contracts with such customers has caused them to incur
damages. One customers lawsuit is pending in the United States District Court for the Central
District of California, and the other is pending as a counterclaim to a collection lawsuit that we
commenced in the United States District Court for the Southern District of Texas. The customers in
these matters have claimed damages in excess of $10 million with one case including a claim for
punitive damages. We believe that these claims are without merit, and we intend to contest them
vigorously. We also believe that the resolution of these claims will not result in a material
adverse impact to our consolidated financial condition.
9
FAIR ISAAC CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Putative Consumer Class Action Lawsuits
We are a defendant in a lawsuit captioned as Robbie Hillis v. Equifax Consumer Services, Inc.
and Fair Isaac, Inc., which is pending in the U.S. District Court for the Northern District of
Georgia. The plaintiff claims that the defendants have jointly sold the Score Power® credit score
product in violation of certain procedural requirements under the Credit Repair Organizations Act
(CROA), and in violation of the antifraud provisions of that statute. The plaintiff also claims
that the defendants are credit repair organizations under CROA. The plaintiff is seeking
certification of a class on behalf of all individuals who purchased products containing Score Power
from the defendants in the five year period prior to the filing of the Complaint on November 14,
2004. The plaintiff is seeking unspecified damages, attorneys fees and costs. We believe that
the claims in this lawsuit are without merit, and we have denied any liability or wrongdoing and
have denied that class certification is appropriate. We are vigorously contesting this matter.
The plaintiff brought a motion for class certification and a motion for summary judgment in his
favor and against the defendants. We opposed, and the Court denied, both of the plaintiffs
motions. The plaintiff has brought a motion asking the Court to reconsider its prior ruling. That
motion is pending. We believe that the resolution of this claim will not result in a material
adverse impact to our consolidated financial condition.
We are a defendant in a lawsuit captioned as Christy Slack v. Fair Isaac Corporation and
MyFICO Consumer Services, Inc., which is pending in the United States District Court for the
Northern District of California. As in the Hillis matter, the plaintiff is claiming that the
defendants violated certain procedural requirements of CROA, and violated the antifraud provisions
of CROA, with respect to the sale of credit score products on our myFICO.com website. The
plaintiff also claims that the defendants violated the California Credit Services Act (the CSA)
and were unjustly enriched. The plaintiff has sought certification of a class on behalf of all
individuals who purchased credit score products from us on the myFICO.com website in the five year
period prior to the filing of the Complaint on January 18, 2005. Plaintiff seeks unspecified
damages, attorneys fees and costs. We believe that the claims in this lawsuit are without merit
and we have denied any liability or wrongdoing and have denied that class certification is
appropriate. We are vigorously contesting this matter. We brought a motion to dismiss the
plaintiffs claims. The Court granted our motion, in part, by dismissing certain of the
plaintiffs claims under the CSA. The plaintiff has brought motions for summary judgment and for
class certification. We have opposed both motions. The Court has not yet ruled on the plaintiffs
motions. We believe that the resolution of this claim will not result in a material adverse impact
to our consolidated financial condition.
Braun Consulting, Inc.
Braun (which we acquired in November 2004) was a defendant in a lawsuit filed on November 26,
2001, in the United States District Court for the Southern District of New York (Case No. 01 CV
10629) that alleges violations of federal securities laws in connection with Brauns initial public
offering in August 1999. This lawsuit is among approximately 300 coordinated putative class
actions against certain issuers, their officers and directors, and underwriters with respect to
such issuers initial public offerings. As successor in interest to Braun, we have entered into a
Stipulation and Agreement of Settlement, pursuant to a Memorandum of Understanding, along with most
of the other defendant issuers in this coordinated litigation, whereby such issuers and their
officers and directors will be dismissed with prejudice, subject to the satisfaction of certain
conditions, including, among others, approval of the court. Under the terms of this agreement, we
will not pay any amount of the settlement.
10. New Accounting Pronouncements Not Yet Adopted
In July 2006, the FASB issued FASB Interpretation No. 48 (FIN 48), Accounting for
Uncertainty in Income Taxes, which prescribes a recognition threshold and measurement process for
recording in the financial statements uncertain tax positions taken or expected to be taken in a
tax return. Additionally, FIN 48 provides guidance on the derecognition, classification, accounting
in interim periods and disclosure requirements for uncertain tax positions. The accounting
provisions of FIN 48 will be effective for the Company beginning October 1, 2007. We are in the
process of determining what effect, if any, the adoption of FIN 48 will have on our consolidated
financial statements.
In September 2006, the SEC released Staff Accounting Bulletin (SAB) No. 108, Considering the
Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial
Statements, which provided the Staffs view regarding the process of quantifying financial
statement misstatements. SAB 108 requires an entity to quantify misstatements using both a balance
sheet and income statement approach to determine if a misstatement is material. The evaluation
requirements of SAB No. 108 are effective for fiscal years ending after November 15, 2006. We are
in the process of determining what effect, if any, the adoption of SAB No. 108 will have on our
consolidated financial statements.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measures, which defines fair
value, establishes a framework for measuring fair value and expands disclosures about assets and
liabilities measured at fair value. The statement is effective for financial statements issued for
fiscal years beginning after November 15, 2007. We are in the process of determining what effect,
if any, the adoption of SFAS No. 157 will have on our consolidated financial statements.
10
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
FORWARD LOOKING STATEMENTS
Statements contained in this Report that are not statements of historical fact should be
considered forward-looking statements within the meaning of the Private Securities Litigation
Reform Act of 1995 (the Act). In addition, certain statements in our future filings with the
Securities and Exchange Commission (SEC), in press releases, and in oral and written statements
made by us or with our approval that are not statements of historical fact constitute
forward-looking statements within the meaning of the Act. Examples of forward-looking statements
include, but are not limited to: (i) projections of revenue, income or loss, earnings or loss per
share, the payment or nonpayment of dividends, capital structure and other statements concerning
future financial performance; (ii) statements of our plans and objectives by our management or
Board of Directors, including those relating to products or services; (iii) statements of
assumptions underlying such statements; (iv) statements regarding business relationships with
vendors, customers or collaborators; and (v) statements regarding products, their characteristics,
performance, sales potential or effect in the hands of customers. Words such as believes,
anticipates, expects, intends, targeted, should, potential, goals, strategy, and
similar expressions are intended to identify forward-looking statements, but are not the exclusive
means of identifying such statements. Forward-looking statements involve risks and uncertainties
that may cause actual results to differ materially from those in such statements. Factors that
could cause actual results to differ from those discussed in the forward-looking statements
include, but are not limited to, those described in Item 1A of Part II, Risk Factors, below. The
performance of our business and our securities may be adversely affected by these factors and by
other factors common to other businesses and investments, or to the general economy.
Forward-looking statements are qualified by some or all of these risk factors. Therefore, you
should consider these risk factors with caution and form your own critical and independent
conclusions about the likely effect of these risk factors on our future performance. Such
forward-looking statements speak only as of the date on which statements are made, and we undertake
no obligation to update any forward-looking statement to reflect events or circumstances after the
date on which such statement is made to reflect the occurrence of unanticipated events or
circumstances. Readers should carefully review the disclosures and the risk factors described in
this and other documents we file from time to time with the SEC, including our reports on Forms
10-Q and 8-K to be filed by the Company in fiscal 2007.
RESULTS OF OPERATIONS
Overview
We are a leader in Enterprise Decision Management (EDM) solutions that enable businesses to
automate and improve their decisions across the enterprise. Our predictive analytics and decision
management systems power hundreds of billions of customer decisions each year. We help companies
acquire customers more efficiently, increase customer value, reduce fraud and credit losses, lower
operating expenses and enter new markets more profitably. Most leading banks and credit card
issuers rely on our solutions, as do many insurers, retailers, telecommunications providers,
healthcare organizations, pharmaceutical and government agencies. We also serve consumers through
online services that enable people to purchase and understand their FICO® scores, the
standard measure of credit risk in the United States, empowering them to manage their financial
health.
Most of our revenues are derived from the sale of products and services within the consumer
credit, financial services and insurance industries, and during the quarter ended December 31,
2006, 75% of our revenues were derived from within these industries. A significant portion of our
remaining revenues is derived from the telecommunications, healthcare and retail industries, as
well as the government sector. Our clients utilize our products and services to facilitate a
variety of business processes, including customer marketing and acquisition, account origination,
credit and underwriting risk management, fraud loss prevention and control, and client account and
policyholder management. A significant portion of our revenues is derived from transactional or
unit-based software license fees, annual license fees under long-term software license
arrangements, transactional fees derived under scoring, network service or internal hosted software
arrangements, and annual software maintenance fees. The recurrence of these revenues is, to a
significant degree, dependent upon our clients continued usage of our products and services in
their business activities. The more significant activities underlying the use of our products in
these areas include: credit and debit card usage or active account levels; lending acquisition,
origination and customer management activity; workers compensation and automobile medical injury
insurance claims; and wireless and wireline calls and subscriber levels. Approximately 74% and 77%
of our revenues during the quarters ended December 31, 2006 and 2005, respectively, were derived
from arrangements with transactional or unit-based pricing. We also derive revenues from other
sources which generally do not recur and include, but are not limited to, perpetual or time-based
licenses with upfront payment terms, non-recurring professional service arrangements and gain-share
arrangements where revenue is derived based on percentages of client revenue growth or cost
reductions attributable to our products.
11
Within a number of our sectors there has been a sizable amount of industry consolidation. In
addition, many of our sectors are experiencing increased levels of competition. As a result of
these factors, we believe that future revenues in particular sectors may decline. However, due to
the long-term customer arrangements we have with many of our customers, the near term impact of
these declines may be more limited in certain sectors.
One measure used by management as an indicator of our business performance is the volume of
new bookings achieved. We define a new booking as estimated future contractual revenues,
including agreements with perpetual, multi-year and annual terms. New bookings values may include:
(i) estimates of variable fee components such as hours to be incurred under new professional
services arrangements and customer account or transaction activity for agreements with
transactional-based fee arrangements, (ii) additional or expanded business from renewals of
contracts, and (iii) to a lesser extent, previous customers that have attrited and been re-sold
only as a result of a significant sales effort. During the quarter ended December 31, 2006, we
achieved new bookings of $72.1 million. There were no deals with bookings values of $3.0 million or
more during the quarter ended December 31, 2006. In comparison, new bookings in the prior year
quarter ended December 31, 2005 were $127.8 million, including eight deals with bookings values of
$3.0 million or more.
Management regards the volume of new bookings achieved, among other factors, as an important
indicator of future revenues, but they are not comparable to, nor should they be substituted for,
an analysis of our revenues, and they are subject to a number of risks and uncertainties, including
those described in Item 1A of Part II, Risk Factors, concerning timing and contingencies affecting
product delivery and performance. Although many of our contracts have fixed non-cancelable terms,
some of our contracts are terminable by the client on short notice or without notice. Accordingly,
we do not believe it is appropriate to characterize all of our new bookings as backlog that will
generate future revenue.
Our revenues derived from clients outside the United States continue to grow, and may in the
future grow more rapidly than our revenues from domestic clients. International revenues totaled
$61.2 million and $51.8 million during the quarters ended December 31, 2006 and 2005, respectively,
representing 29% and 26% of total consolidated revenues in each of these periods. In addition to
clients acquired via our acquisitions, we believe that our international growth is a product of
successful relationships with third parties that assist in international sales efforts and our own
increased sales focus internationally, and we expect that the percentage of our revenues derived
from international clients will increase in the future.
Our reportable segments are: Strategy Machine Solutions, Scoring Solutions, Professional
Services and Analytic Software Tools. Although we sell solutions and services into a large number
of end user product and industry markets, our reportable business segments reflect the primary
method in which management organizes and evaluates internal financial information to make operating
decisions and assess performance. Comparative segment revenues, operating income, and related
financial information for the quarters ended December 31, 2006 and 2005 are set forth in Note 6 to
the accompanying condensed consolidated financial statements.
Revenues
The following tables set forth certain summary information on a segment basis related to our
revenues for the fiscal periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended |
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
Percentage of Revenues |
|
|
|
|
|
|
Period-to-Period |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period-to-Period |
|
|
Percentage |
|
Segment |
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
|
Change |
|
|
Change |
|
|
|
(In thousands) |
|
|
|
|
|
|
|
|
|
|
(In thousands) |
|
|
|
|
|
Strategy Machine Solutions
|
|
$ |
110,669 |
|
|
$ |
111,986 |
|
|
|
53 |
% |
|
|
55 |
% |
|
$ |
(1,317 |
) |
|
|
(1 |
)% |
Scoring Solutions |
|
|
44,918 |
|
|
|
46,156 |
|
|
|
22 |
% |
|
|
23 |
% |
|
|
(1,238 |
) |
|
|
(3 |
)% |
Professional Services |
|
|
38,417 |
|
|
|
32,831 |
|
|
|
18 |
% |
|
|
16 |
% |
|
|
5,586 |
|
|
|
17 |
% |
Analytic Software Tools |
|
|
14,223 |
|
|
|
11,817 |
|
|
|
7 |
% |
|
|
6 |
% |
|
|
2,406 |
|
|
|
20 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
208,227 |
|
|
$ |
202,790 |
|
|
|
100 |
% |
|
|
100 |
% |
|
|
5,437 |
|
|
|
3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended December 31, 2006 Compared to Quarter Ended December 31, 2005 Revenues
Strategy Machine Solutions segment revenues decreased $1.3 million due to a $1.3 million
decrease in revenues from our mortgage banking solutions, a $1.3 million decrease in revenues from
our marketing solutions, a $1.0 million decrease in revenues from our originations solutions and a
$0.4 million net decrease in revenues from our other strategy machine solutions. The revenue
decline was partially offset by a $1.5 million increase in revenues from our fraud solutions, and a
$1.2 million increase in revenues
12
from our customer management solutions. The decrease in mortgage banking solutions revenues
was attributable to declines in license and transactional revenues. The decrease in marketing
solutions revenues was attributable primarily to a decline in sales volumes. The decrease in
originations solutions revenues was the result of a decline in transactional-based revenues due to
a volume decline and unfavorable pricing on a renewed customer contract. The increase in fraud
solutions revenues was attributable primarily to increases in volumes associated with
transactional-based agreements. The increase in customer management solutions revenues was
attributable primarily to an increase in license sales.
Scoring Solutions segment revenues decreased $1.2 million primarily due to a decline in
revenues derived from prescreening services that we provided directly to users in financial
services. This decrease was due to a difficult comparison to strong revenues for these services
that we recorded in the first quarter last year. The decline was partially offset by an increase
in revenues derived from risk scoring services at the credit reporting agencies, resulting from
increased sales of scores for prescreening activities, and an increase in revenues derived from our
FICO expansion score product.
During the quarters ended December 31, 2006 and 2005, revenues generated from our agreements
with Equifax, TransUnion and Experian, collectively accounted for approximately 18% of our total
revenues, including revenues from these customers that are recorded in our other segments.
Professional Services segment revenues increased $5.6 million from consulting services for our
fraud and customer management products. In addition, we had increased revenues for services to
develop predictive models for a large customer. The increase in fraud was primarily due to
revenues derived from a gain-share provision associated with a large customer. The increase was
partially offset by a decline in implementation services for our collection and recovery products.
Analytic Software Tools segment revenues increased $2.4 million primarily due to an increase
in sales of Blaze Advisor perpetual and term licenses and increased maintenance revenue. The
increase reflects the timing of Blaze Advisor sales, which includes large individual contracts.
The increase in maintenance revenues was due to growth in our installed base of Blaze Advisor
software applications.
Operating Expenses and Other Income (Expense)
The following table sets forth certain summary information related to our statements of income
for the fiscal periods indicated.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended |
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
Percentage of Revenues |
|
|
|
|
|
|
Period-to-Period |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period-to-Period |
|
|
Percentage |
|
|
|
2006 |
|
|
2005 |
|
|
2006 |
|
|
2005 |
|
|
Change |
|
|
Change |
|
|
|
(In thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
208,227 |
|
|
$ |
202,790 |
|
|
|
100 |
% |
|
|
100 |
% |
|
$ |
5,437 |
|
|
|
3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues |
|
|
70,569 |
|
|
|
67,045 |
|
|
|
34 |
% |
|
|
33 |
% |
|
|
3,524 |
|
|
|
5 |
% |
Research and development |
|
|
17,719 |
|
|
|
22,730 |
|
|
|
8 |
% |
|
|
11 |
% |
|
|
(5,011 |
) |
|
|
(22 |
)% |
Selling, general and administrative |
|
|
68,648 |
|
|
|
63,383 |
|
|
|
33 |
% |
|
|
31 |
% |
|
|
5,265 |
|
|
|
8 |
% |
Amortization of intangible assets |
|
|
6,390 |
|
|
|
6,263 |
|
|
|
3 |
% |
|
|
3 |
% |
|
|
127 |
|
|
|
2 |
% |
Restructuring and
acquisition-related |
|
|
|
|
|
|
(674 |
) |
|
|
|
|
|
|
|
|
|
|
674 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
163,326 |
|
|
|
158,747 |
|
|
|
78 |
% |
|
|
78 |
% |
|
|
4,579 |
|
|
|
3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
44,901 |
|
|
|
44,043 |
|
|
|
22 |
% |
|
|
22 |
% |
|
|
858 |
|
|
|
2 |
% |
Interest income |
|
|
3,564 |
|
|
|
3,066 |
|
|
|
1 |
% |
|
|
1 |
% |
|
|
498 |
|
|
|
16 |
% |
Interest expense |
|
|
(2,676 |
) |
|
|
(2,135 |
) |
|
|
(1 |
)% |
|
|
(1 |
)% |
|
|
(541 |
) |
|
|
(25 |
%) |
Other expense, net |
|
|
(453 |
) |
|
|
(86 |
) |
|
|
|
|
|
|
|
|
|
|
(367 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes |
|
|
45,336 |
|
|
|
44,888 |
|
|
|
22 |
% |
|
|
22 |
% |
|
|
448 |
|
|
|
1 |
% |
Provision for income taxes |
|
|
14,111 |
|
|
|
16,431 |
|
|
|
7 |
% |
|
|
8 |
% |
|
|
(2,320 |
) |
|
|
(14 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
$ |
31,225 |
|
|
$ |
28,457 |
|
|
|
15 |
% |
|
|
14 |
% |
|
|
2,768 |
|
|
|
10 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of employees at quarter end |
|
|
2,712 |
|
|
|
2,844 |
|
|
|
|
|
|
|
|
|
|
|
(132 |
) |
|
|
(5 |
)% |
13
Cost of Revenues
Cost of revenues consists primarily of employee salaries and benefits for personnel directly
involved in creating, installing and
supporting revenue products; travel and related overhead costs; costs of computer service
bureaus; internal network hosting costs; amounts payable to credit reporting agencies for scores;
software costs; and expenses related to our consumer score services through myFICO.com.
The quarter over quarter increase of $3.5 million in cost of revenues resulted from a $2.9
million increase in personnel and other labor-related costs and a $1.2 million increase in
facilities and infrastructure costs. The increase was partially offset by a $0.6 million decline
in other costs. The increase in personnel and other labor-related costs was attributable primarily
to an increase in salary and related benefit costs, which included the impact of annual staff
salary increases. The increase in facilities and infrastructure costs was attributable primarily
to an increase in allocated facility and information system costs associated with the increase in
professional services activities.
Over the next several quarters, we expect that cost of revenues as a percentage of revenues
will be consistent with that incurred during the quarter ended December 31, 2006.
Research and Development
Research and development expenses include the personnel and related overhead costs incurred in
development of new products and services, including primarily the research of mathematical and
statistical models and the development of new versions of Strategy Machine Solutions and Analytic
Software Tools.
The quarter over quarter decrease of $5.0 million in research and development expenditures was
attributable primarily to a $3.9 million decrease in personnel and related costs and a $0.9 million
decrease in facilities and infrastructure costs. The decrease in personnel and related costs was
the result of lower salary and benefit costs due to the shift of employees to non-U.S. locations
and staff reductions slightly offset by costs associated with annual salary adjustments. The
decrease in facilities and infrastructure costs was attributable primarily to a decrease in
allocated facility and information system costs.
Over the next several quarters, we expect that research and development expenditures as a
percentage of revenues will be consistent with or slightly higher than that incurred during the
quarter ended December 31, 2006.
Selling, General and Administrative
Selling, general and administrative expenses consist principally of employee salaries and
benefits, travel, overhead, advertising and other promotional expenses, corporate facilities
expenses, legal expenses, business development expenses, and the cost of operating computer
systems.
The quarter over quarter increase of $5.3 million in selling, general and administrative
expenses was attributable to a $5.0 million increase in personnel and other labor-related costs and
a $0.3 million net increase in other expenses. The increase in personnel and labor-related costs
resulted primarily from an increase in salary and benefit costs associated with annual salary
adjustments and growth in sales staff. In addition, personnel and other labor-related costs
increased on higher commission costs.
Over the next several quarters, we expect that selling, general and administrative expenses as
a percentage of revenues will be consistent with that incurred during the quarter ended December
31, 2006.
Amortization of Intangible Assets
Amortization of intangible assets consists of amortization expense related to intangible
assets recorded in connection with acquisitions accounted for by the purchase method of accounting.
Our definite-lived intangible assets, consisting primarily of completed technology and customer
contracts and relationships, are being amortized using the straight-line method or based on
forecasted cash flows associated with the assets over periods ranging from two to fifteen years.
Amortization expense for the quarter ended December 31, 2006 was essentially unchanged from
the same period last year.
Restructuring and Acquisition-Related
During the quarter ended December 31, 2005, we recorded a $0.7 million gain due to the
sublease of office space that we had exited in fiscal 2002. The gain resulted from an adjustment
to the liability established for the exit of the lease space and a refund received for past rent
paid to the landlord.
14
Interest Income
Interest income is derived primarily from the investment of funds in excess of our immediate
operating requirements. The quarter over quarter increase in interest income was attributable to
interest associated with settlement of a state tax examination that occurred in the quarter ended
December 31, 2006.
Interest Expense
Interest expense recorded during the quarter ended December 31, 2006 relates to our $400.0
million of 1.5% Senior Convertible Notes (Senior Notes), including the amortization of debt
issuance costs, and interest associated with borrowing under our revolving credit facility.
Interest expense recorded during the quarter ended December 31, 2005 was only related to the Senior
Notes.
Other Expense, Net
Other expense, net consists primarily of realized investment gains/losses, exchange rate
gains/losses resulting from re-measurement of foreign-denominated receivable and cash balances held
by our U.S. reporting entities into the U.S. dollar functional currency at period-end market rates,
net of the impact of offsetting forward exchange contracts, and other non-operating items.
The increase in other expense, net was primarily due to foreign exchange currency losses of
$0.5 million that were recognized in the quarter ended December 31, 2006, compared with foreign
exchange currency losses of $0.1 million recorded in the quarter ended December 31, 2005.
Provision for Income Taxes
Our effective tax rate was 31.1% and 36.6% during the quarters ended December 31, 2006 and
2005, respectively. The provision for income taxes during interim quarterly reporting periods is
based on our estimates of the effective tax rates for the respective full fiscal year. Income tax
expense in the quarter ended December 31, 2006, included a benefit of $1.8 million related to a
favorable settlement of a state tax examination. In addition, income tax expense was reduced by
$0.5 million as a result of the recognition of U.S federal research tax credits related to fiscal
2006. We were unable to recognize these credits during the last nine months of fiscal 2006 as
legislation providing for this credit had expired. In December 2006, legislation was enacted that
provided for retroactive extension of this credit.
Operating Income
The following table sets forth certain summary information on a segment basis related to our
operating income for the fiscal periods indicated.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended |
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
|
|
|
Period-to-Period |
|
|
|
|
|
|
|
|
|
|
|
Period-to-Period |
|
|
Percentage |
|
Segment |
|
2006 |
|
|
2005 |
|
|
Change |
|
|
Change |
|
|
|
(In thousands) |
|
|
|
|
|
Strategy Machine Solutions |
|
$ |
19,863 |
|
|
$ |
20,620 |
|
|
$ |
(757 |
) |
|
|
(4 |
)% |
Scoring Solutions |
|
|
28,879 |
|
|
|
29,534 |
|
|
|
(655 |
) |
|
|
(2 |
)% |
Professional Services |
|
|
3,448 |
|
|
|
1,918 |
|
|
|
1,530 |
|
|
|
80 |
% |
Analytic Software Tools |
|
|
2,283 |
|
|
|
811 |
|
|
|
1,472 |
|
|
|
182 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment operating income |
|
|
54,473 |
|
|
|
52,883 |
|
|
|
1,590 |
|
|
|
3 |
% |
Unallocated share-based compensation |
|
|
(9,572 |
) |
|
|
(9,514 |
) |
|
|
(58 |
) |
|
|
(1 |
)% |
Unallocated restructuring and acquisition-related
|
|
|
|
|
|
|
674 |
|
|
|
(674 |
) |
|
|
(100 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income |
|
$ |
44,901 |
|
|
$ |
44,043 |
|
|
|
858 |
|
|
|
2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The quarter over quarter increase of $0.9 million in operating income was attributable to an
increase in segment revenues. At the segment level, the increase in segment operating income was
driven by increases of $1.5 million in segment operating income within both our Analytic Software
Tools and Professional Services segments, partially offset by a $0.8 million and $0.7 million
decrease in segment operating income within our Strategy Machine Solutions and Scoring Solutions
segments, respectively. The increase in
15
Professional Services segment operating income was the result of the increase in sales,
partially offset by higher personnel costs to support increased professional services activities.
In our Analytic Software Tools segment, higher segment operating income was due to an increase in
sales of perpetual licenses for our EDM products and lower product development costs, partially
offset by increased sales costs. The decrease in Strategy Machine Solutions segment operating
income was attributable to a decline in sales of mortgage solutions, marketing solutions and
originations solutions products. The decrease in Scoring Solutions segment operating income was
attributable primarily to a decline in revenues derived from prescreening services that we provided
directly to users in financial services. We believe that operating income as a percentage of
revenues in our Scoring Solutions segment may decline in the future due to lower operating margins
on new products.
Capital Resources and Liquidity
Cash Flows from Operating Activities
Our primary method for funding operations and growth has been through cash flows generated
from operating activities. Net cash provided by operating activities decreased slightly from $60.7
million during the quarter ended December 31, 2005 to $59.6 million during the quarter ended
December 31, 2006. Operating cash flows were negatively impacted by an increase in trade
receivables of $10.1 million, which resulted from longer payment terms on certain customer
contracts and slower collections. Operating cash flows were positively impacted by the increase in
earnings during the quarter ended December 31, 2006 and a decline in cash paid for income taxes.
Cash Flows from Investing Activities
Net cash provided by investing activities totaled $16.1 million during the quarter ended
December 31, 2006, compared to net cash provided by investing activities of $20.3 million in
quarter ended December 31, 2005. The decline in cash flows provided by investing activities was
primarily attributable to a $1.2 million decrease in proceeds from sales and maturities of
marketable securities, net of purchases, and a $2.6 million increase in property and equipment
purchases.
Cash Flows from Financing Activities
Net cash used by financing activities totaled $53.0 million in the quarter ended December 31,
2006, compared to net cash provided by financing activities of $25.7 million in quarter ended
December 31, 2005. The change in cash flows from financing activities was primarily due to a
$141.7 million increase in common stock repurchased and a $70.0 million increase in cash proceeds
from borrowings under a revolving credit facility. We used cash provided by operations and
borrowings under the revolving credit facility to fund common stock repurchased during the quarter.
Repurchases of Common Stock
From time to time, we repurchase our common stock in the open market pursuant to programs
approved by our Board of Directors. In November 2006, our Board of Directors approved a new common
stock repurchase program that replaced a previous program. The new program allows us to purchase
shares of our common stock up to an aggregate cost of $500.0 million. Through December 31, 2006,
we had repurchased 3,725,400 shares of our common stock under this new program for an aggregate
cost of $154.5 million.
Dividends
During the quarter ended December 31, 2006, we paid a quarterly dividend of two cents per
common share, which is representative of the eight cents per year dividend we have paid in recent
years. Our dividend rate is set by the Board of Directors on a quarterly basis taking into account
a variety of factors, including among others, our operating results and cash flows, general
economic and industry conditions, our obligations, changes in applicable tax laws and other factors
deemed relevant by the Board. Although we expect to continue to pay dividends at the current rate,
our dividend rate is subject to change from time to time based on the Boards business judgment
with respect to these and other relevant factors.
Credit Agreement
In October 2006, we entered into a five-year $300 million unsecured revolving credit facility
with a syndicate of banks. The credit facility may be increased to $500 million subject to certain
terms and conditions. Proceeds from the credit facility can be used for capital requirements and
general business purposes and may be used for the refinancing of existing debt, acquisitions and
repurchases of our common stock. Interest on amounts borrowed under the credit facility is based
on (i) a base rate, which is the greater of (a) the
16
prime rate and (b) the Federal Funds rate plus 0.50% or (ii) LIBOR plus an applicable margin.
The margin on LIBOR borrowings ranges from 0.30% to 0.55% and is determined based on our
consolidated leverage ratio. In addition, we must pay utilization fees if borrowings and
commitments under the credit facility exceed 50% of the total credit facility commitment, as well
as facility fees. The credit facility contains certain restrictive covenants, including maintenance
of consolidated leverage and fixed charge coverage ratios. The credit facility contains other
covenants typical of unsecured facilities. As of December 31, 2006, we had $70.0 million of
borrowings outstanding under the credit facility at an average interest rate of 5.675%.
Capital Resources and Liquidity Outlook
As of December 31, 2006, we had $269.3 million in cash, cash equivalents and marketable
security investments. We believe that these balances, as well as borrowings from our $300 million
revolving credit facility and anticipated cash flows from operating activities, will be sufficient
to fund our working and other capital requirements and any repayment of existing debt over the
course of the next twelve months and for the foreseeable future. In the normal course of business,
we evaluate the merits of acquiring technology or businesses, or establishing strategic
relationships with or investing in these businesses. We may elect to use available cash and cash
equivalents and marketable security investments to fund such activities in the future. In the
event additional needs for cash arise, we may raise additional funds from a combination of sources,
including the potential issuance of debt or equity securities. Additional financing might not be
available on terms favorable to us, or at all. If adequate funds were not available or were not
available on acceptable terms, our ability to take advantage of unanticipated opportunities or
respond to competitive pressures could be limited.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have or are reasonably likely to have a
current or future material effect on our financial condition, changes in financial condition,
revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources.
Critical Accounting Policies and Estimates
We prepare our consolidated financial statements in conformity with U.S. generally accepted
accounting principles. These accounting principles require management to make certain judgments and
assumptions that affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities as of the date of the financial statements, and the reported
amounts of revenues and expenses during the reporting period. We periodically evaluate our
estimates including those relating to revenue recognition, the allowance for doubtful accounts,
goodwill and other intangible assets resulting from business acquisitions, internal-use software,
income taxes and contingencies and litigation. We base our estimates on historical experience and
various other assumptions that we believe to be reasonable based on the specific circumstances, the
results of which form the basis for making judgments about the carrying value of certain assets and
liabilities that are not readily apparent from other sources. Actual results may differ from these
estimates.
We believe the following critical accounting policies involve the most significant judgments
and estimates used in the preparation of our consolidated financial statements:
Revenue Recognition
Software license fee revenue is recognized when persuasive evidence of an arrangement exists,
delivery of the product has occurred at our customers location, the fee is fixed or determinable
and collection is probable. We use the residual method to recognize revenue when an arrangement
includes one or more elements to be delivered at a future date and vendor-specific objective
evidence (VSOE) of the fair value of all undelivered elements exists. VSOE of fair value is
based on the normal pricing practices for those products and services when sold separately by us
and customer renewal rates for post-contract customer support services. Under the residual method,
the fair value of the undelivered elements is deferred and the remaining portion of the arrangement
fee is recognized as revenue. If evidence of the fair value of one or more undelivered elements
does not exist, the revenue is deferred and recognized when delivery of those elements occurs or
when fair value can be established. The determination of whether fees are fixed or determinable
and collection is probable involves the use of assumptions. We evaluate contract terms and
customer information to ensure that these criteria are met prior to our recognition of license fee
revenue. Changes to the elements in a software arrangement, the ability to identify VSOE for those
elements, the fair value of the respective elements, and changes to a products estimated life
cycle could materially impact the amount of earned and unearned revenue.
17
When software licenses are sold together with implementation or consulting services, license
fees are recognized upon delivery
provided that the above criteria are met, payment of the license fees is not dependent upon
the performance of the services, and the services do not provide significant customization or
modification of the software products and are not essential to the functionality of the software
that was delivered. For arrangements with services that are essential to the functionality of the
software, the license and related service revenues are recognized using contract accounting as
described below.
If at the outset of an arrangement we determine that the arrangement fee is not fixed or
determinable, revenue is deferred until the arrangement fee becomes due, assuming all other revenue
recognition criteria have been met. If at the outset of an arrangement we determine that
collectibility is not probable, revenue is deferred until the earlier of when collectibility
becomes probable or the receipt of payment. If there is uncertainty as to the customers
acceptance of our deliverables, revenue is not recognized until the earlier of receipt of customer
acceptance, expiration of the acceptance period or when we can demonstrate we meet the acceptance
criteria.
Revenues from post-contract customer support services, such as software maintenance, are
recognized on a straight-line basis over the term of the support period. The majority of our
software maintenance agreements provide technical support as well as unspecified software product
upgrades and releases when and if made available by us during the term of the support period.
Revenues recognized from our credit scoring, data processing, data management and internet
delivery services are recognized as these services are performed, provided persuasive evidence of
an arrangement exists, fees are fixed or determinable, and collection is reasonably assured. The
determination of certain of our credit scoring and data processing revenues requires the use of
estimates, principally related to transaction volumes in instances where these volumes are reported
to us by our clients on a monthly or quarterly basis in arrears. In these instances, we estimate
transaction volumes based on preliminary customer transaction information, if available, or based
on average actual reported volumes for an immediate trailing period. Differences between our
estimates and actual final volumes reported are recorded in the period in which actual volumes are
reported. We have not experienced significant variances between our estimates and actual reported
volumes in the past and anticipate that we will be able to continue to make reasonable estimates in
the future. If for some reason we were unable to reasonably estimate transaction volumes in the
future, revenue may be deferred until actual customer data was received, and this could have a
material impact on our results of operations during the period of time that we changed accounting
methods.
Transactional or unit-based license fees under software license arrangements, network service
and internally-hosted software agreements are recognized as revenue based on system usage or when
fees based on system usage exceed monthly minimum license fees, provided persuasive evidence of an
arrangement exists, fees are fixed or determinable and collection is probable. The determination of
certain of our transactional or unit-based license fee revenues requires the use of estimates,
principally related to transaction usage or active account volumes in instances where this
information is reported to us by our clients on a monthly or quarterly basis in arrears. In these
instances, we estimate transaction volumes based on preliminary customer transaction information,
if available, or based on average actual reported volumes for an immediate trailing period.
Differences between our estimates and actual final volumes reported are recorded in the period in
which actual volumes are reported. We have not experienced significant variances between our
estimates and actual reported volumes in the past and anticipate that we will be able to continue
to make reasonable estimates in the future. If for some reason we were unable to reasonably
estimate customer account or transaction volumes in the future, revenue would be deferred until
actual customer data was received, and this could have a material impact on our consolidated
results of operations.
We provide consulting, training, model development and software integration services under
both hourly-based time and materials and fixed-priced contracts. Revenues from these services are
generally recognized as the services are performed. For fixed-price service contracts, we apply
the percentage-of-completion method of contract accounting to determine progress towards
completion, which requires the use of estimates. In such instances, management is required to
estimate the input measures, generally based on hours incurred to date compared to total estimated
hours of the project, with consideration also given to output measures, such as contract
milestones, when applicable. Adjustments to estimates are made in the period in which the facts
requiring such revisions become known and, accordingly, recognized revenues and profits are subject
to revisions as the contract progresses to completion. Estimated losses, if any, are recorded in
the period in which current estimates of total contract revenue and contract costs indicate a loss.
If substantive uncertainty related to customer acceptance of services exists, we apply the
completed contract method of accounting and defer the associated revenue until the contract is
completed. If we are unable to accurately estimate the input measures used for
percentage-of-completion accounting, revenue would be deferred until the contract is complete, and
this could have a material impact on our consolidated results of operations.
Revenue recognized under the percentage-of-completion method in excess of contract billings is
recorded as an unbilled receivable. Such amounts are generally billable upon reaching certain
performance milestones as defined by individual contracts. Billings collected in advance of
performance and recognition of revenue under contracts are recorded as deferred revenue.
18
In certain of our non-software arrangements, we enter into contracts that include the delivery
of a combination of two or more of our service offerings. Typically, such multiple element
arrangements incorporate the design and development of data management tools or systems and an
ongoing obligation to manage, host or otherwise run solutions for our customer. Such arrangements
are divided into separate units of accounting provided that the delivered item has stand-alone
value and there is objective and reliable evidence of the fair value of the undelivered items. The
total arrangement fee is allocated to the undelivered elements based on their fair values and to
the initial delivered elements using the residual method. Revenue is recognized separately, and in
accordance with our revenue recognition policy, for each element.
As described above, sometimes our customer arrangements have multiple deliverables, including
service elements. Generally, our multiple element arrangements fall within the scope of specific
accounting standards that provide guidance regarding the separation of elements in
multiple-deliverable arrangements and the allocation of consideration among those elements (e.g.,
American Institute of Certified Public Accountants Statement of Position (SOP) No. 97-2, Software
Revenue Recognition, as amended). If not, we apply the separation provisions of Emerging Issues
Task Force (EITF) Issue No. 00-21, Revenue Arrangements with Multiple Deliverables. The
provisions of EITF Issue No. 00-21 require us to unbundle multiple element arrangements into
separate units of accounting when the delivered element(s) has stand-alone value and fair value of
the undelivered element(s) exists. When we are able to unbundle the arrangement into separate
units of accounting, we apply one of the accounting policies described above to each unit. If we
are unable to unbundle the arrangement into separate units of accounting, we apply one of the
accounting policies described above to the entire arrangement. Sometimes this results in
recognizing the entire arrangement fee when delivery of the last element in a multiple element
arrangement occurs. For example, if the last undelivered element is a service, we recognize
revenue for the entire arrangement fee as the service is performed, or if no pattern of performance
is discernable, we recognize revenue on a straight-line basis over the term of the arrangement.
We record revenue on a net basis for those sales in which we have in substance acted as an
agent or broker in the transaction.
Allowance for Doubtful Accounts
We make estimates regarding the collectibility of our accounts receivable. When we evaluate
the adequacy of our allowance for doubtful accounts, we analyze specific accounts receivable
balances, historical bad debts, customer creditworthiness, current economic trends and changes in
our customer payment cycles. Material differences may result in the amount and timing of expense
for any period if we were to make different judgments or utilize different estimates. If the
financial condition of our customers deteriorates resulting in an impairment of their ability to
make payments, additional allowances might be required. We have not experienced significant
variances in the past between our estimated and actual doubtful accounts and anticipate that we
will be able to continue to make reasonable estimates in the future. If for some reason we did not
reasonably estimate the amount of our doubtful accounts in the future, it could have a material
impact on our consolidated results of operations.
Business Acquisitions; Valuation of Goodwill and Other Intangible Assets
Our business acquisitions typically result in the recognition of goodwill and other intangible
assets, and in certain cases non-recurring charges associated with the write-off of in-process
research and development (IPR&D), which affect the amount of current and future period charges
and amortization expense. Goodwill represents the excess of the purchase price over the fair value
of net assets acquired, including identified intangible assets, in connection with our business
combinations accounted for by the purchase method of accounting. We amortize our definite-lived
intangible assets using the straight-line method or based on forecasted cash flows associated with
the assets over the estimated useful lives, while IPR&D is recorded as a non-recurring charge on
the acquisition date. Goodwill is not amortized, but rather is periodically assessed for
impairment.
The determination of the value of these components of a business combination, as well as
associated asset useful lives, requires management to make various estimates and assumptions.
Critical estimates in valuing certain of the intangible assets include but are not limited to:
future expected cash flows from product sales and services, maintenance agreements, consulting
contracts, customer contracts, and acquired developed technologies and patents or trademarks;
expected costs to develop the IPR&D into commercially viable products and estimating cash flows
from the projects when completed; the acquired companys brand awareness and market position, as
well as assumptions about the period of time the acquired products and services will continue to be
used in our product portfolio; and discount rates. Managements estimates of fair value and useful
lives are based upon assumptions believed to be reasonable, but which are inherently uncertain and
unpredictable. Unanticipated events and circumstances may occur and assumptions may change.
Estimates using different assumptions could also produce significantly different results.
19
We continually review the events and circumstances related to our financial performance and
economic environment for factors that would provide evidence of the impairment of our intangible
assets. When impairment indicators are identified with respect to our
previously recorded intangible assets, then we test for impairment using undiscounted cash
flows. If such tests indicate impairment, then we measure the impairment as the difference between
the carrying value of the asset and the fair value of the asset, which is measured using discounted
cash flows. Significant management judgment is required in forecasting of future operating results,
which are used in the preparation of the projected discounted cash flows and should different
conditions prevail, material write downs of net intangible assets and other long-lived assets could
occur. We periodically review the estimated remaining useful lives of our acquired intangible
assets. A reduction in our estimate of remaining useful lives, if any, could result in increased
amortization expense in future periods.
We test goodwill for impairment at the reporting unit level at least annually during the
fourth quarter of each fiscal year and more frequently if impairment indicators are identified. We
have determined that our reporting units are the same as our reportable segments. The first step of
the goodwill impairment test is a comparison of the fair value of a reporting unit to its carrying
value. We estimate the fair values of our reporting units using discounted cash flow valuation
models and by comparing our reporting units to guideline publicly-traded companies. These methods
require estimates of our future revenues, profits, capital expenditures, working capital, and other
relevant factors, as well as selecting appropriate guideline publicly-traded companies for each
reporting unit. We estimate these amounts by evaluating historical trends, current budgets,
operating plans, industry data, and other relevant factors. The estimated fair value of each of our
reporting units exceeded its respective carrying value in fiscal 2006, indicating the underlying
goodwill of each reporting unit was not impaired as of our most recent testing date. Accordingly,
we were not required to complete the second step of the goodwill impairment test. The timing and
frequency of our goodwill impairment test is based on an ongoing assessment of events and
circumstances that would more than likely reduce the fair value of a reporting unit below its
carrying value. We will continue to monitor our goodwill balance and conduct formal tests on at
least an annual basis or earlier when impairment indicators are present. There are various
assumptions and estimates underlying the determination of an impairment loss, and estimates using
different, but each reasonable, assumptions could produce significantly different results.
Therefore, the timing and recognition of impairment losses by us in the future, if any, may be
highly dependent upon our estimates and assumptions. We believe that the assumptions and estimates
utilized were appropriate based on the information available to management.
Share-Based Compensation
Prior to October 1, 2005, we accounted for our share-based employee compensation plans under
the measurement and recognition provisions of Accounting Principles Board (APB) Opinion No. 25,
Accounting for Stock Issued to Employees, and related Interpretations, as permitted by Financial
Accounting Standards Board (FASB) SFAS No. 123, Accounting for Stock-Based Compensation. We
generally recorded no employee compensation expense for options granted prior to October 1, 2005 as
options granted generally had exercise prices equal to the fair market value of our common stock on
the date of grant. We also recorded no compensation expense in connection with our 1999 Employee
Stock Purchase Plan as the purchase price of the stock was not less than 85% of the lower of the
fair market value of our common stock at the beginning of each offering period or at the end of
each offering period. In accordance with SFAS No. 123, we disclosed our net income and earnings per
share as if we had applied the fair value-based method in measuring compensation expense for our
share-based incentive awards.
Effective October 1, 2005, we adopted the fair value recognition provisions of SFAS No.
123(R), Share-Based Payment, using the modified prospective transition method. Under that
transition method, compensation expense that we recognize beginning on that date includes expense
associated with the fair value of all awards granted on and after October 1, 2005, and expense for
the unvested portion of previously granted awards outstanding on October 1, 2005. Results for prior
periods have not been restated.
We estimate the fair value of options granted using the Black-Scholes option valuation model.
We estimate the volatility of our common stock at the date of grant based on a combination of the
implied volatility of publicly traded options on our common stock and our historical volatility
rate, consistent with SFAS No. 123(R) and Securities and Exchange Commission Staff Accounting
Bulletin No. 107 (SAB 107). Our decision to use implied volatility was based upon the
availability of actively traded options on our common stock and our assessment that implied
volatility is more representative of future stock price trends than historical volatility. We
estimate expected term consistent with the simplified method identified in SAB 107 for share-based
awards. We elected to use the simplified method as we changed the contractual life for share-based
awards from ten to seven years starting in fiscal 2006. The simplified method calculates the
expected term as the average of the vesting and contractual terms of the award. Previously, we
estimated expected term based on historical exercise patterns. The dividend yield assumption is
based on historical dividend payouts. The risk-free interest rate assumption is based on observed
interest rates appropriate for the term of our employee options. We use historical data to estimate
pre-vesting option forfeitures and record share-based compensation expense only for those awards
that are expected to vest. For options granted, we amortize the fair value on a straight-line
basis. All options are amortized over the requisite service periods of the awards, which are
generally the vesting periods. If factors change we may decide to use different assumptions under
the Black-Scholes option valuation model in the future, which could materially affect our net
income and earnings per share.
20
Income Taxes
We use the asset and liability approach to account for income taxes. This methodology
recognizes deferred tax assets and liabilities for the expected future tax consequences of
temporary differences between the carrying amounts and the tax base of assets and liabilities and
operating loss and tax credit carryforwards. We then record a valuation allowance to reduce
deferred tax assets to an amount that more likely than not will be realized. We consider future
taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for
the valuation allowance, which requires the use of estimates. If we determine during any period
that we could realize a larger net deferred tax asset than the recorded amount, we would adjust the
deferred tax asset to increase income for the period or reduce goodwill if such deferred tax asset
relates to an acquisition. Conversely, if we determine that we would be unable to realize a
portion of our recorded deferred tax asset, we would adjust the deferred tax asset to record a
charge to income for the period or increase goodwill if such deferred tax asset relates to an
acquisition. Although we believe that our estimates are reasonable, there is no assurance that our
the valuation allowance will not need to be increased to cover additional deferred tax assets that
may not be realizable, and such an increase could have a material adverse impact on our income tax
provision and results of operations in the period in which such determination is made. In addition,
the calculation of tax liabilities also involves significant judgment in estimating the impact of
uncertainties in the application of complex tax laws. Resolution of these uncertainties in a manner
inconsistent with managements expectations could also have a material impact on our income tax
provision and results of operations in the period in which such determination is made.
Contingencies and Litigation
We are subject to various proceedings, lawsuits and claims relating to products and services,
technology, labor, shareholder and other matters. We are required to assess the likelihood of any
adverse outcomes and the potential range of probable losses in these matters. If the potential loss
is considered probable and the amount can be reasonably estimated, we accrue a liability for the
estimated loss. If the potential loss is considered less than probable or the amount cannot be
reasonably estimated, disclosure of the matter is considered. The amount of loss accrual or
disclosure, if any, is determined after analysis of each matter, and is subject to adjustment if
warranted by new developments or revised strategies. Due to uncertainties related to these matters,
accruals or disclosures are based on the best information available at the time. Significant
judgment is required in both the assessment of likelihood and in the determination of a range of
potential losses. Revisions in the estimates of the potential liabilities could have a material
impact on our consolidated financial position or consolidated results of operations.
New Accounting Pronouncements Not Yet Adopted
In July 2006, the FASB issued FASB Interpretation No. 48 (FIN 48), Accounting for
Uncertainty in Income Taxes, which prescribes a recognition threshold and measurement process for
recording in the financial statements uncertain tax positions taken or expected to be taken in a
tax return. Additionally, FIN 48 provides guidance on the derecognition, classification, accounting
in interim periods and disclosure requirements for uncertain tax positions. The accounting
provisions of FIN 48 will be effective for the Company beginning October 1, 2007. We are in the
process of determining what effect, if any, the adoption of FIN 48 will have on our consolidated
financial statements.
In September 2006, the SEC released Staff Accounting Bulletin (SAB) No. 108, Considering the
Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial
Statements, which provided the Staffs view regarding the process of quantifying financial
statement misstatements. SAB 108 requires an entity to quantify misstatements using both a balance
sheet and income statement approach to determine if a misstatement is material. The evaluation
requirements of SAB No. 108 are effective for fiscal years ending after November 15, 2006. We are
in the process of determining what effect, if any, the adoption of SAB No. 108 will have on our
consolidated financial statements.
In September 2006, the FASB issued SFAS No. 157, Fair Value Measures, which defines fair
value, establishes a framework for measuring fair value and expands disclosures about assets and
liabilities measured at fair value. The statement is effective for financial statements issued for
fiscal years beginning after November 15, 2007. We are in the process of determining what effect,
if any, the adoption of SFAS No. 157 will have on our consolidated financial statements.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market Risk Disclosures
We are exposed to market risk related to changes in interest rates, equity market prices, and
foreign currency exchange rates. We do not use derivative financial instruments for speculative or
trading purposes.
21
Interest Rate Risk
We maintain an investment portfolio consisting mainly of income securities with an average
maturity of three years or less. These available-for-sale securities are subject to interest rate
risk and will fall in value if market interest rates increase. We have the ability to hold our
fixed income investments until maturity, and therefore we would not expect our operating results or
cash flows to be affected to any significant degree by the effect of a sudden change in market
interest rates on our securities portfolio. The following table presents the principal amounts and
related weighted-average yields for our investments with interest rate risk at December 31, 2006
and September 30, 2006:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2006 |
|
|
September 30, 2006 |
|
|
|
Cost |
|
|
Carrying |
|
|
Average |
|
|
Cost |
|
|
Carrying |
|
|
Average |
|
|
|
Basis |
|
|
Amount |
|
|
Yield |
|
|
Basis |
|
|
Amount |
|
|
Yield |
|
|
|
(In thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
99,149 |
|
|
$ |
99,149 |
|
|
|
2.98 |
% |
|
$ |
75,178 |
|
|
$ |
75,154 |
|
|
|
2.85 |
% |
Short-term investments |
|
|
122,997 |
|
|
|
122,812 |
|
|
|
4.84 |
% |
|
|
152,446 |
|
|
|
152,141 |
|
|
|
4.79 |
% |
Long-term investments |
|
|
41,753 |
|
|
|
41,679 |
|
|
|
5.20 |
% |
|
|
33,306 |
|
|
|
33,254 |
|
|
|
5.10 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
263,899 |
|
|
$ |
263,640 |
|
|
|
4.20 |
% |
|
$ |
260,930 |
|
|
$ |
260,549 |
|
|
|
4.27 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
We are the issuer of 1.5% Senior Convertible Notes (Senior Notes) that mature in August
2023. The fair value of our Senior Notes, as determined based on quoted market prices, may
increase or decrease due to various factors, including fluctuations in the market price of our
common stock, fluctuations in market interest rates and fluctuations in general economic
conditions. The following table presents the principal amounts, carrying amounts, and fair values
for our Senior Notes at December 31, 2006 and September 30, 2006:
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|
|
|
|
|
|
|
|
|
December 31, 2006 |
|
September 30, 2006 |
|
|
|
|
|
|
Carrying |
|
Fair |
|
|
|
|
|
Carrying |
|
Fair |
|
|
Principal |
|
Amount |
|
Value |
|
Principal |
|
Amount |
|
Value |
|
|
(In thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
Senior Notes |
|
$ |
400,000 |
|
|
$ |
400,000 |
|
|
$ |
424,000 |
|
|
$ |
400,000 |
|
|
$ |
400,000 |
|
|
$ |
407,000 |
|
We have interest rate risk with respect to our five-year $300 million unsecured revolving
credit facility. Interest rates are applied to amounts outstanding under this facility at variable
rates based on Federal Funds rate plus 0.50% or LIBOR plus margins that range from 0.30% to 0.55%
based on our consolidated leverage ratio. A change in interest rates on this variable rate debt
impacts the interest incurred and cash flows, but does not impact the fair value of the instrument.
As of December 31, 2006 we had $70.0 million of borrowings outstanding on this facility and we had
no borrowings outstanding as of September 30, 2006.
Forward Foreign Currency Contracts
We maintain a program to manage our foreign currency exchange rate risk on existing foreign
currency receivable and bank balances by entering into forward contracts to sell or buy foreign
currency. At period end, foreign-denominated receivables and cash balances held by our U.S.
reporting entities are remeasured into the U.S. dollar functional currency at current market rates.
The change in value from this remeasurement is then reported as a foreign exchange gain or loss
for that period in our accompanying consolidated statements of income and the resulting gain or
loss on the forward contract mitigates the exchange rate risk of the associated assets. All of our
forward foreign currency contracts have maturity periods of less than three months. Such derivative
financial instruments are subject to market risk.
The following table summarizes our outstanding forward foreign currency contracts, by currency
at December 31, 2006:
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|
|
|
|
|
|
|
|
|
|
|
|
Contract Amount |
|
|
|
|
Foreign |
|
|
|
|
|
Fair Value |
|
|
Currency |
|
US $ |
|
US $ |
|
|
(In thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Sell foreign currency: |
|
|
|
|
|
|
|
|
|
|
|
|
EURO (EUR) |
|
EUR 13,650 |
|
$ |
17,969 |
|
|
$ |
|
|
Japanese Yen (YEN) |
|
YEN 110,000 |
|
|
925 |
|
|
|
|
|
Buy foreign currency: |
|
|
|
|
|
|
|
|
|
|
|
|
British Pound (GBP) |
|
GBP 4,082 |
|
$ |
8,000 |
|
|
$ |
|
|
22
The forward foreign currency contracts were all entered into on December 31, 2006, therefore,
the fair value was $0 on that date.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
An evaluation was carried out under the supervision and with the participation of Fair Isaacs
management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness
of the design and operation of Fair Isaacs disclosure controls and procedures (as defined in Rule
13a-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)) as of the end
of the period covered by this quarterly report. Based on that evaluation, the Chief Executive
Officer and Chief Financial Officer have concluded that Fair Isaacs disclosure controls and
procedures are effective to ensure that information required to be disclosed by Fair Isaac in
reports that it files or submits under the Exchange Act is (i) recorded, processed, summarized and
reported within the time periods specified in SEC rules and forms and (ii) accumulated and
communicated to the Chief Executive Officer and Chief Financial Officer to allow timely decisions
regarding required disclosure.
Changes in Internal Control over Financial Reporting
No change in Fair Isaacs internal control over financial reporting was identified in
connection with the evaluation required by Rule 13a-15(d) of the Exchange Act that occurred during
the period covered by this quarterly report and that has materially affected, or is reasonably
likely to materially affect, our internal control over financial reporting.
PART II OTHER INFORMATION
Item 1. Legal Proceedings
We are a defendant in a lawsuit captioned as Robbie Hillis v. Equifax Consumer Services, Inc.
and Fair Isaac, Inc., which is pending in the U.S. District Court for the Northern District of
Georgia. The plaintiff claims that the defendants have jointly sold the Score Power® credit score
product in violation of certain procedural requirements under the Credit Repair Organizations Act
(CROA), and in violation of the antifraud provisions of that statute. The plaintiff also claims
that the defendants are credit repair organizations under CROA. The plaintiff is seeking
certification of a class on behalf of all individuals who purchased products containing Score Power
from the defendants in the five year period prior to the filing of the Complaint on November 14,
2004. The plaintiff is seeking unspecified damages, attorneys fees and costs. We believe that
the claims in this lawsuit are without merit, and we have denied any liability or wrongdoing and
have denied that class certification is appropriate. We are vigorously contesting this matter.
The plaintiff brought a motion for class certification and a motion for summary judgment in his
favor and against the defendants. We opposed, and the Court denied, both of the plaintiffs
motions. The plaintiff has brought a motion asking the Court to reconsider its prior ruling. That
motion is pending.
We are a defendant in a lawsuit captioned as Christy Slack v. Fair Isaac Corporation and
MyFICO Consumer Services, Inc., which is pending in the United States District Court for the
Northern District of California. As in the Hillis matter, the plaintiff is claiming that the
defendants violated certain procedural requirements of CROA, and violated the antifraud provisions
of CROA, with respect to the sale of credit score products on our myFICO.com website. The
plaintiff also claims that the defendants violated the California Credit Services Act (the CSA)
and were unjustly enriched. The plaintiff has sought certification of a class on behalf of all
individuals who purchased credit score products from us on the myFICO.com website in the five year
period prior to the filing of the Complaint on January 18, 2005. Plaintiff seeks unspecified
damages, attorneys fees and costs. We believe that the claims in this lawsuit are without merit
and we have denied any liability or wrongdoing and have denied that class certification is
appropriate. We are vigorously contesting this matter. We brought a motion to dismiss the
plaintiffs claims. The Court granted our motion, in part, by dismissing certain of the
plaintiffs claims under the CSA. The plaintiff has brought motions for summary judgment and for
class certification. We have opposed both motions. The Court has not yet ruled on the plaintiffs
motions.
23
Item 1A. Risk Factors
Risks Related to Our Business
We have expanded the pursuit of our EDM strategy, and we may not be successful.
We have expanded the pursuit of our business objective to become a leader in helping
businesses automate and improve decisions across their enterprises, an approach that we commonly
refer to as Enterprise Decision Management, or EDM. Our EDM strategy is designed to enable us to
increase our business by selling multiple products to clients, as well as to enable the development
of custom client solutions that may lead to opportunities to develop new proprietary scores or
other new proprietary products. The market may be unreceptive to this general EDM business
approach, including being unreceptive to purchasing multiple products from us or unreceptive to our
customized solutions. If our EDM strategy is not successful, we may not be able to grow our
business, growth may occur more slowly than we anticipate or our revenues and profits may decline.
We recently restructured the method by which we sell our products and services and if our new
sales strategy is not successful, our business will be harmed.
Previously, we sold our products and services in a product-focused manner. As part of our
expanded EDM strategy, we now sell our products and services using a client-centric approach which
focuses on delivering complete solutions involving multiple products or suites of products for our
customers through various means, including the use of client teams called Integrated Client
Networks (or ICNs) that focus on customers by vertical market and geography, and the use of an
integrated consulting and sales approach. If our employees are not able to adjust rapidly enough
to this ICN approach, then we may be unable to maintain or increase our revenues. Further, there
can be no assurance that our customers and potential customers will react positively to EDM or this
new selling approach and, as a result, that we will continue to maintain or increase revenues. If
revenues eventually increase as a result of this change, there is no assurance that any increase
will occur as quickly as we might anticipate.
We derive a substantial portion of our revenues from a small number of products and services, and
if the market does not continue to accept these products and services, our revenues will decline.
As we attempt to implement our EDM strategy, we expect that revenues derived from our scoring
solutions, account management solutions, fraud solutions, originations, collections, and insurance
solutions products and services will continue to account for a substantial portion of our total
revenues for the foreseeable future. Our revenues will decline if the market does not continue to
accept these products and services. Factors that might affect the market acceptance of these
products and services include the following:
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|
|
changes in the business analytics industry; |
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|
|
changes in technology; |
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|
|
our inability to obtain or use state fee schedule or claims data in our insurance products; |
|
|
|
|
saturation of market demand; |
|
|
|
|
loss of key customers; |
|
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|
|
industry consolidation; |
|
|
|
|
failure to execute our client-centric selling approach; and |
|
|
|
|
inability to successfully sell our products in new vertical markets. |
If we are unable to access new markets or develop new distribution channels, our business and
growth prospects could suffer.
We expect that part of the growth that we seek to achieve through our EDM strategy will be
derived from the sale of EDM products and service solutions in industries and markets we do not
currently serve. We also expect to grow our business by delivering our EDM solutions through
additional distribution channels. If we fail to penetrate these industries and markets to the
degree we anticipate utilizing our EDM strategy, or if we fail to develop additional distribution
channels, we may not be able to grow our business, growth may occur more slowly than we anticipate
or our revenues and profits may decline.
If we are unable to develop successful new products or if we experience defects, failures and
delays associated with the introduction of new products, our business could suffer serious harm.
Our growth and the success of our EDM strategy depends upon our ability to develop and sell
new products or suites of products. If we are unable to develop new products, or if we are not
successful in introducing new products, we may not be able to grow our business, or growth may
occur more slowly than we anticipate. In addition, significant undetected errors or delays in new
products or
24
new versions of products may affect market acceptance of our products and could harm our
business, financial condition or results of operations. In the past, we have experienced delays
while developing and introducing new products and product enhancements, primarily due to
difficulties developing models, acquiring data and adapting to particular operating environments.
We have also experienced errors or bugs in our software products, despite testing prior to
release of the products. Software errors in our products could affect the ability of our products
to work with other hardware or software products, could delay the development or release of new
products or new versions of products and could adversely affect market acceptance of our products.
Errors or defects in our products that are significant, or are perceived to be significant, could
result in rejection of our products, damage to our reputation, loss of revenues, diversion of
development resources, an increase in product liability claims, and increases in service and
support costs and warranty claims.
We rely on relatively few customers, as well as our contracts with the three major credit
reporting agencies, for a significant portion of our revenues and profits. If the terms of these
relationships change, our revenues and operating results could decline.
Most of our customers are relatively large enterprises, such as banks, credit card processors,
insurance companies, healthcare firms, retailers and telecommunications carriers. As a result,
many of our customers and potential customers are significantly larger than we are and may have
sufficient bargaining power to demand reduced prices and favorable nonstandard terms.
We also derive a substantial portion of our revenues and operating income from our contracts
with the three major credit reporting agencies, TransUnion, Equifax and Experian, and other parties
that distribute our products to certain markets. We are also currently involved in litigation with
TransUnion, Equifax and Experian arising from their development and marketing of a credit scoring
product competitive with our products. We have asserted various claims, including claims of unfair
competition and antitrust, against each of the credit reporting agencies and their collective joint
venture entity, VantageScore, LLC. This litigation could have a material adverse effect on our
relationship with one or more of the major credit reporting agencies, or with major customers.
The loss of or a significant change in a relationship with a major customer, the loss of or a
significant change in a relationship with one of the major credit reporting agencies with respect
to their distribution of our products or with respect to our myFICO offerings, the loss of or a
significant change in a relationship with a significant third-party distributor or the delay of
significant revenues from these sources, could have a material adverse effect on our revenues and
results of operations.
We rely on relationships with third parties for marketing and distribution. If we experience
difficulties in these relationships, our future revenues may be adversely affected.
Our Scoring Solutions segment and Strategy Machine Solutions segment rely on distributors, and
we intend to continue to market and distribute our products through existing and future distributor
relationships. Our Scoring Solutions segment relies on, among others, TransUnion, Equifax and
Experian. Failure of our existing and future distributors to generate significant revenues,
demands by such distributors to change the terms on which they offer our products or our failure to
establish additional distribution or sales and marketing alliances could have a material adverse
effect on our business, operating results and financial condition. In addition, certain of our
distributors presently compete with us and may compete with us in the future either by developing
competitive products themselves or by distributing competitive offerings. For example, TransUnion,
Equifax and Experian have developed a credit scoring product to compete directly with our products
and are collectively attempting to sell the product. Competition from distributors or other sales
and marketing partners could significantly harm sales of our products.
If we do not engage in acquisition activity to the extent we have in the past, we may be unable to
increase our revenues at historical growth rates.
Our historical revenue growth has been augmented by numerous acquisitions, and we anticipate
that acquisitions will continue to be an important part of our revenue growth. Our future revenue
growth rate may decline if we do not make acquisitions of similar size and at a comparable rate as
in the past.
If we engage in acquisitions, significant investments in new businesses, or divestitures of
existing businesses, we will incur a variety of risks, any of which may adversely affect our
business.
We have made in the past, and may make in the future, acquisitions of, or significant
investments in, businesses that offer complementary products, services and technologies. Any
acquisitions or investments will be accompanied by the risks commonly encountered in acquisitions
of businesses, which may include:
|
|
|
failure to achieve the financial and strategic goals for the acquired and combined business; |
25
|
|
|
overpayment for the acquired companies or assets; |
|
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|
|
difficulty assimilating the operations and personnel of the acquired businesses; |
|
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|
|
product liability exposure associated with acquired businesses or the sale of their products; |
|
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|
|
disruption of our ongoing business; |
|
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|
|
dilution of our existing stockholders and earnings per share; |
|
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|
|
unanticipated liabilities, legal risks and costs; |
|
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|
|
retention of key personnel; |
|
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|
|
distraction of management from our ongoing business; and |
|
|
|
|
impairment of relationships with employees and customers as a result of integration of new management personnel. |
We have also divested ourselves of businesses in the past, and may do so again in the future.
Any divestitures will be accompanied by the risks commonly encountered in the sale of businesses,
which may include:
|
|
|
disruption of our ongoing business; |
|
|
|
|
reductions of our revenues or earnings per share; |
|
|
|
|
unanticipated liabilities, legal risks and costs; |
|
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|
|
the potential loss of key personnel; |
|
|
|
|
distraction of management from our ongoing business; and |
|
|
|
|
impairment of relationships with employees and customers as a result of migrating a business to new owners. |
These risks could harm our business, financial condition or results of operations,
particularly if they occur in the context of a significant acquisition. Acquisitions of businesses
having a significant presence outside the U.S. will increase our exposure to the risks of
conducting operations in international markets.
The occurrence of certain negative events may cause fluctuations in our stock price.
The market price of our common stock may be volatile and could be subject to wide fluctuations
due to a number of factors, including variations in our revenues and operating results. We believe
that you should not rely on period-to-period comparisons of financial results as an indication of
future performance. Because many of our operating expenses are fixed and will not be affected by
short-term fluctuations in revenues, short-term fluctuations in revenues may significantly impact
operating results. Additional factors that may cause our stock price to fluctuate include the
following:
|
|
|
variability in demand from our existing customers; |
|
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|
|
failure to meet the expectations of market analysts; |
|
|
|
|
changes in recommendations by market analysts; |
|
|
|
|
the lengthy and variable sales cycle of many products, combined with the relatively large
size of orders for our products, increases the likelihood of short-term fluctuation in
revenues; |
|
|
|
|
consumer dissatisfaction with, or problems caused by, the performance of our products; |
|
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|
|
the timing of new product announcements and introductions in comparison with our competitors; |
|
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|
|
the level of our operating expenses; |
|
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|
|
changes in competitive conditions in the consumer credit, financial services and insurance industries; |
|
|
|
|
fluctuations in domestic and international economic conditions; |
|
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|
|
our ability to complete large installations on schedule and within budget; |
|
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|
|
acquisition-related expenses and charges; and |
|
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|
|
timing of orders for and deliveries of software systems. |
In addition, the financial markets have experienced significant price and volume fluctuations
that have particularly affected the stock prices of many technology companies, and these
fluctuations sometimes have been unrelated to the operating performance of these companies. Broad
market fluctuations, as well as industry-specific and general economic conditions may adversely
affect the market price of our common stock.
26
Our products have long and variable sales cycles. If we do not accurately predict these cycles,
we may not forecast our financial results accurately and our stock price could be adversely
affected.
We experience difficulty in forecasting our revenues accurately because the length of our
sales cycles makes it difficult for us to predict the quarter in which sales will occur. In
addition, our ICN selling approach is more complex than our prior sales approach because it
emphasizes the sale of complete EDM solutions involving multiple products or services across our
customers organizations. This makes forecasting of revenues in any given period more difficult.
As a result of our ICN approach and lengthening sales cycles, revenues and operating results may
vary significantly from period to period. For example, the sales cycle for licensing our products
typically ranges from 60 days to 18 months. Customers are often cautious in making decisions to
acquire our products, because purchasing our products typically involves a significant commitment
of capital, and may involve shifts by the customer to a new software and/or hardware platform or
changes in the customers operational procedures. Since our EDM strategy contemplates the sale of
multiple decision solutions to a customer, expenditures by any given customer are expected to be
larger than with our prior sales approach. This may cause customers to make purchasing decisions
more cautiously. Delays in completing sales can arise while customers complete their internal
procedures to approve large capital expenditures and test and accept our applications.
Consequently, we face difficulty predicting the quarter in which sales to expected customers will
occur and experience fluctuations in our revenues and operating results. If we are unable to
accurately forecast our revenues, our stock price could be adversely affected.
We typically have revenue-generating transactions concentrated in the final weeks of a quarter
which may prevent accurate forecasting of our financial results and cause our stock price to
decline.
Large portions of our software license agreements are consummated in the weeks immediately
preceding quarter end. Before these agreements are consummated we create and rely on forecasted
revenues for planning, modeling and earnings guidance. Forecasts, however, are only estimates and
actual results may vary for a particular quarter or longer periods of time. Consequently,
significant discrepancies between actual and forecasted results could limit our ability to plan,
budget or provide accurate guidance, which could adversely affect our stock price. Any
publicly-stated revenue or earnings projections are subject to this risk.
The failure to recruit and retain additional qualified personnel could hinder our ability to
successfully manage our business.
Our EDM strategy and our future success will depend in large part on our ability to attract
and retain experienced sales, consulting, research and development, marketing, technical support
and management personnel. The complexity of our products requires highly trained customer service
and technical support personnel to assist customers with product installation and deployment. The
labor market for these individuals is very competitive due to the limited number of people
available with the necessary technical skills and understanding and may become more competitive
with general market and economic improvement. We cannot be certain that our compensation
strategies will be perceived as competitive by current or prospective employees. This could impair
our ability to recruit and retain personnel. We have experienced difficulty in recruiting
qualified personnel, especially technical, sales and consulting personnel, and we may need
additional staff to support new customers and/or increased customer needs. We may also recruit
skilled technical professionals from other countries to work in the United States. Limitations
imposed by immigration laws in the United States and abroad and the availability of visas in the
countries where we do business could hinder our ability to attract necessary qualified personnel
and harm our business and future operating results. There is a risk that even if we invest
significant resources in attempting to attract, train and retain qualified personnel, we will not
succeed in our efforts, and our business could be harmed. Non-appreciation in the value of our
stock may adversely affect our ability to use equity and equity based incentive plans to attract
and retain personnel, and may require us to use alternative and more expensive forms of
compensation for this purpose.
The failure to obtain certain forms of model construction data from our customers or others could
harm our business.
We must develop or obtain a reliable source of sufficient amounts of current and statistically
relevant data to analyze transactions and update our products. In most cases, these data must be
periodically updated and refreshed to enable our products to continue to work effectively in a
changing environment. We do not own or control much of the data that we require, most of which is
collected privately and maintained in proprietary databases. Customers and key business alliances
provide us the data we require to analyze transactions, report results and build new models. Our
EDM strategy depends in part upon our ability to access new forms of data to develop custom and
proprietary analytic tools. If we fail to maintain sufficient sourcing relationships with our
customers and business alliances, or if they decline to provide such data due to legal privacy
concerns, competition concerns, prohibitions or a lack of permission from their customers, we could
lose access to required data and our products might become less effective. In addition, certain of
our insurance solutions products use data from state workers compensation fee schedules adopted by
state regulatory agencies. Third parties have asserted copyright interests in these data, and
these assertions, if successful, could prevent us from using these data. Any interruption of our
supply of data could seriously harm our business, financial condition or results of operations.
27
We will continue to rely upon proprietary technology rights, and if we are unable to protect them,
our business could be harmed.
Our success depends, in part, upon our proprietary technology and other intellectual property
rights. To date, we have relied primarily on a combination of copyright, patent, trade secret, and
trademark laws, and nondisclosure and other contractual restrictions on copying and distribution to
protect our proprietary technology. This protection of our proprietary technology is limited, and
our proprietary technology could be used by others without our consent. In addition, patents may
not be issued with respect to our pending or future patent applications, and our patents may not be
upheld as valid or may not prevent the development of competitive products. Any disclosure, loss,
invalidity of, or failure to protect our intellectual property could negatively impact our
competitive position, and ultimately, our business. There can be no assurance that our protection
of our intellectual property rights in the United States or abroad will be adequate or that others,
including our competitors, will not use our proprietary technology without our consent.
Furthermore, litigation may be necessary to enforce our intellectual property rights, to protect
our trade secrets, or to determine the validity and scope of the proprietary rights of others.
Such litigation could result in substantial costs and diversion of resources and could harm our
business, financial condition or results of operations.
Some of our technologies were developed under research projects conducted under agreements
with various U.S. government agencies or subcontractors. Although we have commercial rights to
these technologies, the U.S. government typically retains ownership of intellectual property rights
and licenses in the technologies developed by us under these contracts, and in some cases can
terminate our rights in these technologies if we fail to commercialize them on a timely basis.
Under these contracts with the U.S. government, the results of research may be made public by the
government, limiting our competitive advantage with respect to future products based on our
research.
If we are subject to infringement claims, it could harm our business.
With recent developments in the law that permit patenting of business methods, we expect that
products in the industry segments in which we compete, including software products, will
increasingly be subject to claims of patent infringement as the number of products and competitors
in our industry segments grow. We may need to defend claims that our products infringe patent,
copyright or other rights, and as a result we may:
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incur significant defense costs or substantial damages; |
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be required to cease the use or sale of infringing products; |
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expend significant resources to develop or license a substitute non-infringing technology; |
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discontinue the use of some technology; or |
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be required to obtain a license under the intellectual property rights of the third party
claiming infringement, which license may not be available or might require substantial
royalties or license fees that would reduce our margins. |
Breaches of security, or the perception that e-commerce is not secure, could harm our business.
Our business requires the appropriate and secure utilization of consumer and other sensitive
information. Internet-based, electronic commerce requires the secure transmission of confidential
information over public networks, and several of our products are accessed through the Internet,
including our consumer services accessible through the www.myFICO.com website. Security breaches
in connection with the delivery of our products and services, including products and services
utilizing the Internet, or well-publicized security breaches, and the trend toward broad consumer
and general public notification of such incidents, could significantly harm our business, financial
condition or results of operations. We cannot be certain that advances in criminal capabilities,
discovery of new vulnerabilities, attempts to exploit vulnerabilities in our systems, data thefts,
physical system or network break-ins or inappropriate access, or other developments will not
compromise or breach the technology protecting the networks that access our net-sourced products,
consumer services and proprietary database information.
Protection from system interruptions is important to our business. If we experience a sustained
interruption of our telecommunication systems it could harm our business.
Systems or network interruptions could delay and disrupt our ability to develop, deliver or
maintain our products and services, causing harm to our business and reputation and resulting in
loss of customers or revenue. These interruptions can include fires, floods, earthquakes, power
losses, equipment failures and other events beyond our control.
28
Risks Related to Our Industry
Our ability to increase our revenues will depend to some extent upon introducing new products and
services. If the marketplace does not accept these new products and services, our revenues may
decline.
We have a significant share of the available market in portions of our Scoring Solutions
segment and for certain services in our Strategy Machine Solutions segment, specifically, the
markets for account management services at credit card processors and credit card fraud detection
software. To increase our revenues, we must enhance and improve existing products and continue to
introduce new products and new versions of existing products that keep pace with technological
developments, satisfy increasingly sophisticated customer requirements and achieve market
acceptance. We believe much of the future growth of our business and the success of our EDM
strategy will rest on our ability to continue to expand into newer markets for our products and
services, such as direct marketing, healthcare, insurance, small business lending, retail,
telecommunications, personal credit management, the design of business strategies using Strategy
Science technology and Internet services. These areas are relatively new to our product
development and sales and marketing personnel. Products that we plan to market in the future are
in various stages of development. We cannot assure you that the marketplace will accept these
products. If our current or potential customers are not willing to switch to or adopt our new
products and services, our revenues will decrease.
If we fail to keep up with rapidly changing technologies, our products could become less
competitive or obsolete.
In our markets, technology changes rapidly, and there are continuous improvements in computer
hardware, network operating systems, programming tools, programming languages, operating systems,
database technology and the use of the Internet. If we fail to enhance our current products and
develop new products in response to changes in technology or industry standards, or if we fail to
bring product enhancements or new product developments to market quickly enough, our products could
rapidly become less competitive or obsolete. For example, the rapid growth of the Internet
environment creates new opportunities, risks and uncertainties for businesses, such as ours, which
develop software that must also be designed to operate in Internet, intranet and other online
environments. Our future success will depend, in part, upon our ability to:
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innovate by internally developing new and competitive technologies; |
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use leading third-party technologies effectively; |
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continue to develop our technical expertise; |
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anticipate and effectively respond to changing customer needs; |
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initiate new product introductions in a way that minimizes the impact of customers
delaying purchases of existing products in anticipation of new product releases; and |
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influence and respond to emerging industry standards and other technological changes. |
If our competitors introduce new products and pricing strategies, it could decrease our product
sales and market share, or could pressure us to reduce our product prices in a manner that reduces
our margins.
We may not be able to compete successfully against our competitors, and this inability could
impair our capacity to sell our products. The market for business analytics is new, rapidly
evolving and highly competitive, and we expect competition in this market to persist and intensify.
Our regional and global competitors vary in size and in the scope of the products and services
they offer, and include:
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in-house analytic and systems developers; |
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scoring model builders; |
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enterprise resource planning (ERP) and customer relationship management (CRM) packaged solutions providers; |
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business intelligence solutions providers; |
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credit report and credit score providers; |
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business process management solution providers; |
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process modeling tools providers; |
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automated application processing services providers; |
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data vendors; |
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neural network developers and artificial intelligence system builders; |
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third-party professional services and consulting organizations; |
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account/workflow management software providers; |
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managed care organizations; and |
29
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software tools companies supplying modeling, rules, or analytic development tools. |
We expect to experience additional competition from other established and emerging companies,
as well as from other technologies. For example, certain of our fraud solutions products compete
against other methods of preventing credit card fraud, such as credit cards that contain the
cardholders photograph, smart cards, cardholder verification and authentication solutions and
other card authorization techniques. Many of our anticipated competitors have greater financial,
technical, marketing, professional services and other resources than we do and industry
consolidation is creating even larger competitors in many of our markets. As a result, our
competitors may be able to respond more quickly to new or emerging technologies and changes in
customer requirements. They may also be able to devote greater resources than we can to develop,
promote and sell their products. Many of these companies have extensive customer relationships,
including relationships with many of our current and potential customers. Furthermore, new
competitors or alliances among competitors may emerge and rapidly gain significant market share.
For example, TransUnion, Equifax and Experian have formed an alliance that has developed a credit
scoring product competitive with our products. If we are unable to respond as quickly or
effectively to changes in customer requirements as our competition, our ability to expand our
business and sell our products will be negatively affected.
Our competitors may be able to sell products competitive to ours at lower prices individually
or as part of integrated suites of several related products. This ability may cause our customers
to purchase products that directly compete with our products from our competitors. Price
reductions by our competitors could negatively impact our margins, and could also harm our ability
to obtain new long-term contracts and renewals of existing long-term contracts on favorable terms.
Government regulations that apply to us or to our customers may expose us to liability, affect our
ability to compete in certain markets, limit the profitability of or demand for our products, or
render our products obsolete. If these regulations are applied or are further developed in ways
adverse to us, it could adversely affect our business and results of operations.
Legislation and governmental regulation affect how our business is conducted and, in some
cases, subject us to the possibility of future lawsuits arising from our products and services.
Globally, legislation and governmental regulation also influence our current and prospective
customers activities, as well as their expectations and needs in relation to our products and
services. Both our core businesses and our newer initiatives are affected globally by federal,
regional, provincial, state and other jurisdictional regulations, including those in the following
significant regulatory areas:
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Consumer report data and consumer reporting agencies. Examples in the U.S. include: the
Fair Credit Reporting Act (FCRA), the Fair and Accurate Credit Transactions Act (FACTA),
which amends FCRA, and certain proposed regulations under FACTA, presently under
consideration; |
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Identity theft and loss of data. Examples include FACTA and other regulations modeled
after the current California Security Breach Notification Act, that require consumer
notification of security breach incidents and additional federal and state legislative
enactments in this area; |
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Fair and non-discriminatory lending practices, such as the Equal Credit Opportunity Act
(ECOA); |
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Privacy-related laws, including but not limited to the provisions of the Financial
Services Modernization Act of 1999, also known as the Gramm Leach Bliley Act (GLBA), the
Health Insurance Portability and Accountability Act of 1996 (HIPAA), the Uniting and
Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct
Terrorism Act of 2001 (USA Patriot Act) and similar state privacy laws; |
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Extension of credit to consumers through the Electronic Fund Transfers Act, as well as
non-governmental VISA and MasterCard electronic payment standards; |
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Quasi-governmental regulations, such as Fannie Mae and Freddie Mac regulations for our mortgage services products; |
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Insurance regulations related to our insurance products; |
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The application or extension of consumer protection laws, including, state and federal
laws governing the use of the Internet and telemarketing, and credit repair; |
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Jurisdictional regulations applicable to international operations, including the European
Unions Privacy Directive; and |
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Sarbanes-Oxley Act (SOX) regulations to verify internal process controls and require
material event awareness and notification. |
In making credit evaluations of consumers, performing fraud screening or user authentication,
our customers are subject to requirements of multiple jurisdictions which may impose contradictory
requirements. Privacy legislation such as GLBA or the European Unions Privacy Directive may also
affect the nature and extent of the products or services that we can provide to customers, as well
as our ability to collect, monitor and disseminate information subject to privacy protection. In
addition to existing regulation, changes in legislative, judicial, regulatory or consumer
environments could harm our business, financial condition or
30
results of operations. For example, the FACTA amendments to FCRA will result in new
regulation. These regulations or the interpretation of these amendments could affect the demand for
or profitability of some of our products, including scoring and consumer products. New regulations
pertaining to financial institutions could cause them to pursue new strategies, reducing the demand
for our products. In addition, legislative reforms of workers compensation laws that aim to
simplify this area of regulation and curb abuses could diminish the need for, and the benefits
provided by, certain of our insurance solutions products and services.
Our revenues depend, to a great extent, upon conditions in the consumer credit, financial services
and insurance industries. If any of our clients industries experiences a downturn, it could harm
our business, financial condition or results of operations.
During fiscal 2006, 71% of our revenues were derived from sales of products and services to
the consumer credit, financial services and insurance industries. A downturn in the consumer
credit, the financial services or the insurance industry, including a downturn caused by increases
in interest rates or a tightening of credit, among other factors, could harm our business,
financial condition or results of operations. While the rate of account growth in the U.S.
bankcard industry has been slowing and many of our large institutional customers have merged and
consolidated in recent years, we have generated most of our revenue growth from our
bankcard-related scoring and account management businesses by selling and cross-selling our
products and services to large banks and other credit issuers. As this industry continues to
consolidate, we may have fewer opportunities for revenue growth due to changing demand for our
products and services that support customer acquisition programs of our customers. In addition,
industry consolidation could affect the base of recurring revenues derived from contracts in which
we are paid on a per-transaction basis if consolidated customers combine their operations under one
contract. There can be no assurance that we will be able effectively to promote future revenue
growth in our businesses.
While we are expanding our sales of consumer credit, financial services and insurance products
and services into international markets, the risks are greater as we are less well-known and some
of these markets are in their infancy.
Risk Related to External Conditions
If any of a number of material adverse developments occurs in general economic conditions and
world events, such developments could affect demand for our products and services and harm our
business.
Purchases of technology products and services and decisioning solutions are subject to adverse
economic conditions. When an economy is struggling, companies in many industries delay or reduce
technology purchases, and we experience softened demand for our decisioning solutions and other
products and services. If the current improvement in global economic conditions slows or reverses,
or if there is an escalation in regional or continued global conflicts or terrorism, we may
experience reductions in capital expenditures by our customers, longer sales cycles, deferral or
delay of purchase commitments for our products and increased price competition, which may adversely
affect our business and results of operations.
In operations outside the United States, we are subject to unique risks that may harm our
business, financial condition or results of operations.
A growing portion of our revenues is derived from international sales. During fiscal 2006,
28% of our revenues were derived from business outside the United States. As part of our growth
strategy, we plan to continue to pursue opportunities outside the United States, including
opportunities in countries with economic systems that are in early stages of development and that
may not mature sufficiently to result in growth for our business. Accordingly, our future
operating results could be negatively affected by a variety of factors arising out of international
commerce, some of which are beyond our control. These factors include:
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general economic and political conditions in countries where we sell our products and services; |
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difficulty in staffing and efficiently managing our operations in multiple geographic locations and in various countries; |
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effects of a variety of foreign laws and regulations, including restrictions on access to personal information; |
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import and export licensing requirements; |
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longer payment cycles; |
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reduced protection for intellectual property rights; |
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currency fluctuations; |
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changes in tariffs and other trade barriers; and |
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difficulties and delays in translating products and related documentation into foreign languages. |
There can be no assurance that we will be able to successfully address each of these
challenges in the near term. Additionally, some of our business will be conducted in currencies
other than the U.S. dollar. Foreign currency transaction gains and losses are not
currently material to our cash flows, financial position or results of operations. However,
an increase in our foreign revenues could subject us to increased foreign currency transaction
risks in the future.
31
In addition to the risk of depending on international sales, we have risks incurred in having
research and development personnel located in various international locations. We currently have a
substantial portion of our product development staff in international locations, some of which have
political and developmental risks. If such risks materialize, our business could be damaged.
Our anti-takeover defenses could make it difficult for another company to acquire control of Fair
Isaac, thereby limiting the demand for our securities by certain types of purchasers or the price
investors are willing to pay for our stock.
Certain provisions of our Restated Certificate of Incorporation, as amended, could make a
merger, tender offer or proxy contest involving us difficult, even if such events would be
beneficial to the interests of our stockholders. These provisions include adopting a Shareholder
Rights Agreement, commonly known as a poison pill, and giving our board the ability to issue
preferred stock and determine the rights and designations of the preferred stock at any time
without stockholder approval. The rights of the holders of our common stock will be subject to,
and may be adversely affected by, the rights of the holders of any preferred stock that may be
issued in the future. The issuance of preferred stock, while providing flexibility in connection
with possible acquisitions and other corporate purposes, could have the effect of making it more
difficult for a third party to acquire, or discouraging a third party from acquiring, a majority of
our outstanding voting stock. These factors and certain provisions of the Delaware General
Corporation Law may have the effect of deterring hostile takeovers or otherwise delaying or
preventing changes in control or changes in our management, including transactions in which our
stockholders might otherwise receive a premium over the fair market value of our common stock.
If we experience changes in tax laws or adverse outcomes resulting from examination of our income
tax returns, it could adversely affect our results of operations.
We are subject to federal and state income taxes in the United States and in certain foreign
jurisdictions. Significant judgment is required in determining our worldwide provision for income
taxes. Our future effective tax rates could be adversely affected by changes in tax laws, by our
ability to generate taxable income in foreign jurisdictions in order to utilize foreign tax losses,
and by the valuation of our deferred tax assets. In addition, we are subject to the examination of
our income tax returns by the Internal Revenue Service and other tax authorities. We regularly
assess the likelihood of adverse outcomes resulting from such examinations to determine the
adequacy of our provision for income taxes. There can be no assurance that the outcomes from such
examinations will not have an adverse effect on our operating results and financial condition.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Purchases of Equity Securities (1)
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Total Number of |
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Shares Purchased as |
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Maximum Dollar Value |
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Part of Publicly |
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of Share that May |
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Total Number of |
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Average Price |
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Announced Plans |
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Yet Be Purchased Under |
Period |
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Shares Purchased |
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Paid per Share |
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or Programs |
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the Plans or Programs |
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October 1, 2006 through October 31, 2006 |
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$ |
164,665,553 |
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November 1, 2006 through November 30, 2006 |
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3,112,900 |
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$ |
41.39 |
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3,112,900 |
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$ |
371,157,965 |
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December 1, 2006 through December 31, 2006 |
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612,500 |
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41.87 |
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612,500 |
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$ |
345,510,098 |
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3,725,400 |
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$ |
41.47 |
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3,725,400 |
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$ |
345,510,098 |
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(1) |
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In November 2006, our Board of Directors canceled the August 2006 repurchase program and
approved a new repurchase program that allows us to purchase up to an aggregate of $500
million in shares of our common stock in the open market or though negotiated transactions. |
Item 3. Defaults Upon Senior Securities
Not applicable.
32
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5. Other Information
Not applicable.
Item 6. Exhibits
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Exhibit |
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Number |
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Description |
10.1
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Transition Agreement dated December 8, 2006, by and between
Fair Isaac Corporation and Gresham T. Brebach, Jr. |
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10.2 |
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Form of Restricted Stock Unit agreement |
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31.1
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Rule 13a-14(a)/15d-14(a) Certifications of CEO. |
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31.2
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Rule 13a-14(a)/15d-14(a) Certifications of CFO. |
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32.1 |
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Section 1350 Certification of CEO. |
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32.2 |
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Section 1350 Certification of CFO. |
33
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as
amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
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DATE: February 7, 2007 |
FAIR ISAAC CORPORATION
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By |
/s/ CHARLES M. OSBORNE
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Charles M. Osborne
Interim Chief Executive Officer, Vice President
and Chief Financial Officer
(for Registrant as duly authorized officer and
as Principal Financial Officer) |
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DATE: February 7, 2007 |
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By |
/s/ MICHAEL J. PUNG
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Michael J. Pung
Vice President, Finance
(Principal Accounting Officer) |
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34
EXHIBIT INDEX
To Fair Isaac Corporation Report On Form 10-Q
For The Quarterly Period Ended December 31, 2006
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Exhibit |
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Number |
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Description |
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10.1
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Transition Agreement dated December 8, 2006, by and
between Fair Isaac Corporation and Gresham T.
Brebach, Jr.
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Filed Electronically |
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10.2
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Form of Restricted Stock Unit agreement
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Filed Electronically |
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31.1
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Rule 13a-14(a)/15d-14(a) Certifications of CEO.
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Filed Electronically |
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31.2
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Rule 13a-14(a)/15d-14(a) Certifications of CFO.
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Filed Electronically |
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32.1
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Section 1350 Certification of CEO.
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Filed Electronically |
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32.2
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Section 1350 Certification of CFO.
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Filed Electronically |
35