FICO 10-Q Q3 2014
Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
Form 10-Q
 
 (Mark One)
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2014
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     
Commission File Number 1-11689 
 
 
Fair Isaac Corporation
(Exact name of registrant as specified in its charter)
 
 
Delaware
94-1499887
(State or other jurisdiction of
(I.R.S. Employer
incorporation or organization)
Identification No.)
 
 
181 Metro Drive, Suite 700
San Jose, California
95110-1346
(Address of principal executive offices)
(Zip Code)
Registrant’s telephone number, including area code: 408-535-1500
 
 
 
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  ý    No  o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer
ý
Accelerated Filer
o
 
 
 
 
Non-Accelerated Filer
o
Smaller Reporting Company
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    ¨  Yes    ý  No
The number of shares of common stock outstanding on July 18, 2014 was 32,148,684 (excluding 56,708,099 shares held by us as treasury stock).
 


Table of Contents

TABLE OF CONTENTS
 
 
 
 
 
 
Item 1.
Item 2.
Item 3.
Item 4.
 
 
 
 
 
 
 
 
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
 



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PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
FAIR ISAAC CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
June 30,
2014
 
September 30,
2013
 
(In thousands, except par value data)
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
93,109

 
$
83,178

Accounts receivable, net
155,495

 
143,733

Prepaid expenses and other current assets
24,691

 
22,277

Total current assets
273,295

 
249,188

Marketable securities available for sale
8,689

 
7,107

Other investments
11,033

 
11,033

Property and equipment, net
37,280

 
45,155

Goodwill
787,209

 
773,931

Intangible assets, net
52,053

 
57,361

Deferred income taxes
9,765

 
11,132

Other assets
6,423

 
6,640

Total assets
$
1,185,747

 
$
1,161,547

Liabilities and Stockholders’ Equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
21,098

 
$
19,216

Accrued compensation and employee benefits
42,634

 
39,281

Other accrued liabilities
41,421

 
35,202

Deferred revenue
53,849

 
49,181

Current maturities on debt
154,000

 
23,000

Total current liabilities
313,002

 
165,880

Senior notes
376,000

 
447,000

Other liabilities
17,571

 
17,990

Total liabilities
706,573

 
630,870

Commitments and contingencies

 

Stockholders’ equity:
 
 
 
Preferred stock [$0.01 par value; 1,000 shares authorized; none issued and outstanding]

 

Common stock [$0.01 par value; 200,000 shares authorized, 88,857 shares issued and 32,855 and 34,786 shares outstanding at June 30, 2014 and September 30, 2013, respectively]
329

 
348

Paid-in-capital
1,121,511

 
1,110,198

Treasury stock, at cost [56,002 and 54,071 shares at June 30, 2014 and September 30, 2013, respectively]
(1,882,659
)
 
(1,751,057
)
Retained earnings
1,248,298

 
1,192,096

Accumulated other comprehensive loss
(8,305
)
 
(20,908
)
Total stockholders’ equity
479,174

 
530,677

Total liabilities and stockholders’ equity
$
1,185,747

 
$
1,161,547


See accompanying notes to condensed consolidated financial statements.

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FAIR ISAAC CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited)
 
Quarter Ended June 30,
 
Nine Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
 
(In thousands, except per share data)
Revenues:
 
 
 
 
 
 
 
Transactional and maintenance
$
132,254

 
$
129,422

 
$
394,278

 
$
385,759

Professional services
38,522

 
32,306

 
107,427

 
98,752

License
26,834

 
22,044

 
65,710

 
68,606

Total revenues
197,610

 
183,772

 
567,415

 
553,117

Operating expenses:
 
 
 
 
 
 
 
Cost of revenues *
62,752

 
57,655

 
178,254

 
172,659

Research and development
23,240

 
18,570

 
61,022

 
49,143

Selling, general and administrative *
71,557

 
68,665

 
204,490

 
205,968

Amortization of intangible assets *
3,019

 
3,477

 
8,940

 
10,453

Restructuring and acquisition-related
621

 
197

 
4,281

 
3,486

Total operating expenses
161,189

 
148,564

 
456,987

 
441,709

Operating income
36,421

 
35,208

 
110,428

 
111,408

Interest income
13

 
15

 
29

 
45

Interest expense
(7,064
)
 
(7,432
)
 
(21,305
)
 
(23,167
)
Other income (expense), net
931

 
830

 
(381
)
 
765

Income before income taxes
30,301

 
28,621

 
88,771

 
89,051

Provision for income taxes
9,753

 
8,999

 
30,495

 
27,513

Net income
20,548

 
19,622

 
58,276

 
61,538

Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation adjustments
5,705

 
(1,284
)
 
12,603

 
(15,705
)
Comprehensive income
$
26,253

 
$
18,338

 
$
70,879

 
$
45,833

Earnings per share:
 
 
 
 
 
 
 
Basic
$
0.60

 
$
0.55

 
$
1.69

 
$
1.74

Diluted
$
0.58

 
$
0.54

 
$
1.65

 
$
1.69

Shares used in computing earnings per share:
 
 
 
 
 
 
 
Basic
34,210

 
35,499

 
34,458

 
35,400

Diluted
35,162

 
36,385

 
35,420

 
36,340

 
 
* Cost of revenues and selling, general and administrative expenses exclude the amortization of intangible assets. See Note 5 to the condensed consolidated financial statements.
See accompanying notes to condensed consolidated financial statements.


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FAIR ISAAC CORPORATION
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(Unaudited)
(In thousands, except per share data)
 
 
Common Stock
 
 
 
 
 
Retained Earnings
 
Accumulated Other
Comprehensive Loss
 
Total
Stockholders’ Equity
 
Shares
 
Par Value
 
Paid-in-Capital
 
Treasury Stock
 
 
 
Balance at September 30, 2013
34,786

 
$
348

 
$
1,110,198

 
$
(1,751,057
)
 
$
1,192,096

 
$
(20,908
)
 
$
530,677

Share-based compensation

 

 
25,631

 

 

 

 
25,631

Issuance of treasury stock under employee stock plans
840

 
8

 
(20,162
)
 
27,405

 

 

 
7,251

Tax effect from share-based payment arrangements

 

 
5,844

 

 

 

 
5,844

Repurchases of common stock
(2,771
)
 
(27
)
 

 
(159,007
)
 

 

 
(159,034
)
Dividends paid ($0.06 per share)

 

 

 

 
(2,074
)
 

 
(2,074
)
Net income

 

 

 

 
58,276

 

 
58,276

Foreign currency translation adjustments

 

 

 

 

 
12,603

 
12,603

Balance at June 30, 2014
32,855

 
$
329

 
$
1,121,511

 
$
(1,882,659
)
 
$
1,248,298

 
$
(8,305
)
 
$
479,174

See accompanying notes to condensed consolidated financial statements.


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FAIR ISAAC CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
Nine Months Ended June 30,
 
2014

2013
 
(In thousands)
Cash flows from operating activities:
 
 
 
Net income
$
58,276

 
$
61,538

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
24,196

 
25,160

Share-based compensation
25,631

 
18,897

Deferred income taxes
(7,576
)
 
(5,515
)
Tax effect from share-based payment arrangements
5,844

 
2,245

Excess tax benefits from share-based payment arrangements
(5,934
)
 
(5,073
)
Net amortization of premium on marketable securities

 
8

Provision for doubtful accounts, net
998

 
293

Net loss on sales of property and equipment
3

 
393

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
(9,934
)
 
9,977

Prepaid expenses and other assets
1,206

 
1,841

Accounts payable
1,622

 
4,987

Accrued compensation and employee benefits
2,976

 
(12,897
)
Other liabilities
5,532

 
(1,213
)
Deferred revenue
973

 
(464
)
Net cash provided by operating activities
103,813

 
100,177

Cash flows from investing activities:
 
 
 
Purchases of property and equipment
(7,088
)
 
(20,435
)
Proceeds from maturities of marketable securities

 
22,000

Cash paid for acquisitions, net of cash acquired
(7,253
)
 
(32,874
)
Distribution from cost method investees

 
50

Net cash used in investing activities
(14,341
)
 
(31,259
)
Cash flows from financing activities:
 
 
 
Proceeds from revolving line of credit
96,000

 
30,000

Payments on revolving line of credit and other short-term loans
(28,000
)
 
(3,676
)
Payments on senior notes
(8,000
)
 
(49,000
)
Proceeds from issuance of treasury stock under employee stock plans
7,251

 
23,790

Dividends paid
(2,074
)
 
(2,123
)
Repurchases of common stock
(152,329
)
 
(47,811
)
Excess tax benefits from share-based payment arrangements
5,934

 
5,073

Net cash used in financing activities
(81,218
)
 
(43,747
)
Effect of exchange rate changes on cash
1,677

 
(3,761
)
Increase in cash and cash equivalents
9,931

 
21,410

Cash and cash equivalents, beginning of period
83,178

 
71,609

Cash and cash equivalents, end of period
$
93,109

 
$
93,019

Supplemental disclosures of cash flow information:
 
 
 
Cash paid for income taxes, net of refunds
$
17,174

 
$
23,139

Cash paid for interest
$
21,468

 
$
24,480

Supplemental disclosures of non-cash investing and financing activities:
 
 
 
Purchase of property and equipment included in accounts payable
$
708

 
$
1,533

Unsettled repurchases of common stock
$
8,846

 
$

See accompanying notes to condensed consolidated financial statements.


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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 (“FICO”) is a provider of analytic, software and data management products and services that enable businesses to automate, improve and connect decisions. FICO 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, healthcare organizations and public agencies.
In these condensed consolidated financial statements, FICO is referred to as “we,” “us,” “our,” or “FICO”.
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 applicable accounting guidance. 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, 2013. 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 FICO 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. Significant items subject to such estimates and assumptions include, but are not limited to: revenue recognition; recoverability of accounts receivable; valuation of goodwill and intangible assets, including impairment assessment; valuation of share-based compensation; and realizability of deferred tax assets.
New Accounting Pronouncements Recently Issued or Adopted
In July 2013, the Financial Accounting Standards Board (FASB) issued ASU No. 2013-11, “Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists.” (ASU 2013-11). ASU 2013-11 provides guidance for presentation of an unrecognized tax benefit, or a portion of an unrecognized tax benefit. ASU 2013-11 provides that a benefit should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, except as follows. To the extent a net operating loss carryforward, a similar tax loss, or a tax credit carryforward is not available at the reporting date under the tax law of the applicable jurisdiction to settle any additional income taxes that would result from the disallowance of a tax position or the tax law of the applicable jurisdiction does not require the entity to use, and the entity does not intend to use, the deferred tax asset for such purpose, the unrecognized tax benefit should be presented in the financial statements as a liability and should not be combined with deferred tax assets. ASU 2013-11 is effective for fiscal years and interim periods within those years, beginning on or after December 15, 2013, which means it will be effective for our fiscal year beginning October 1, 2014. We do not believe that adoption of ASU 2013-11 will have a significant impact on our condensed consolidated financial statements.
    
In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” (ASU 2014-09). ASU 2014-09 requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. ASU 2014-09 will replace most existing revenue recognition guidance in U.S. Generally Accepted Accounting Principles when it becomes effective and permits the use of either the retrospective or cumulative effect transition method. The guidance also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts. Early adoption is not permitted. ASU 2014-09 is

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effective for fiscal years and interim periods within those years, beginning on or after December 15, 2016, which means it will be effective for our fiscal year beginning October 1, 2017. We have not yet selected a transition method and we are currently evaluating the impact that the updated standard will have on our consolidated financial statements.

2. Acquisitions
On April 1, 2014, we acquired 100% of the common stock of InfoCentricity, Inc. (“InfoCentricity”) for $8.2 million in cash. InfoCentricity is a software-as-a-service-based predictive analytics software company that allows FICO to immediately broaden its offering for predictive analytics modeling and decision strategies. FICO will leverage the InfoCentricity products through availability to the FICO Analytic Cloud as well as an on premise offering for organizations across all industries. InfoCentricity has been included in our operating results since the acquisition date. The pro forma impact of this acquisition was not deemed material to our results of operations.



3. Fair Value Measurements
Fair value is defined as the price that would be received from the sale of an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The accounting guidance establishes a three-level hierarchy for disclosure that is based on the extent and level of judgment used to estimate the fair value of assets and liabilities.
 
Level 1 - uses unadjusted quoted prices that are available in active markets for identical assets or liabilities. Our Level 1 assets are comprised of money market funds and certain equity securities.
Level 2 - uses inputs other than quoted prices included in Level 1 that are either directly or indirectly observable through correlation with market data. These include quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; and inputs to valuation models or other pricing methodologies that do not require significant judgment because the inputs used in the model, such as interest rates and volatility, can be corroborated by readily observable market data. We do not have any assets that are valued using inputs identified under a Level 2 hierarchy as of June 30, 2014 and September 30, 2013.
Level 3 - uses one or more significant inputs that are unobservable and supported by little or no market activity, and that reflect the use of significant management judgment. Level 3 assets and liabilities include those whose fair value measurements are determined using pricing models, discounted cash flow methodologies or similar valuation techniques, and significant management judgment or estimation. We do not have any assets or liabilities that are valued using inputs identified under a Level 3 hierarchy as of June 30, 2014 and September 30, 2013.
The following table represents financial assets that we measured at fair value on a recurring basis at June 30, 2014 and September 30, 2013:

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June 30, 2014
Active Markets for
Identical Instruments
(Level 1)
 
Fair Value as of June 30, 2014
Assets:
 
 
 
Cash equivalents (1)
$
5,735

 
$
5,735

Marketable securities (2)
8,689

 
8,689

Total
$
14,424

 
$
14,424

September 30, 2013
Active Markets for
Identical Instruments
(Level 1)
 
Fair Value as of September 30, 2013
Assets:
 
 
 
Cash equivalents (1)
$
685

 
$
685

Marketable securities (2)
7,107

 
7,107

Total
$
7,792

 
$
7,792

 
(1)
Included in cash and cash equivalents on our condensed consolidated balance sheet at June 30, 2014 and September 30, 2013. Not included in this table are cash deposits of $87.4 million and $82.5 million at June 30, 2014 and September 30, 2013, respectively.
(2)
Represents securities held under a supplemental retirement and savings plan for senior management employees, which are distributed upon termination or retirement of the employees. Included in marketable securities available for sale on our condensed consolidated balance sheet at June 30, 2014 and September 30, 2013.
Where applicable, we use quoted prices in active markets for identical assets or liabilities to determine fair value. This pricing applies to our Level 1 investments. To the extent quoted prices in active markets for assets or liabilities are not available, the valuation techniques used to measure the fair values of our financial assets incorporate market inputs, which include reported trades, broker/dealer quotes, benchmark yields, issuer spreads, benchmark securities and other inputs derived from or corroborated by observable market data. This methodology would apply to our Level 2 investments. We have not changed our valuation techniques in measuring the fair value of any financial assets and liabilities during the period.
For the fair value of our derivative instruments and senior notes, see Note 4 and Note 8 to the condensed consolidated financial statements, respectively.
4. Derivative Financial Instruments
We use derivative instruments to manage risks caused by fluctuations in foreign exchange rates. The primary objective of our derivative instruments is to protect the value of foreign-currency-denominated receivable and cash balances from the effects of volatility in foreign exchange rates that might occur prior to conversion to their respective functional currencies. We principally utilize foreign currency forward contracts, which enable us to buy and sell foreign currencies in the future at fixed exchange rates and economically offset changes in foreign exchange rates. We routinely enter into contracts to offset exposures denominated in the British pound, Euro and Canadian dollar.
Foreign-currency-denominated receivable and cash balances are remeasured at foreign exchange rates in effect on the balance sheet date with the effects of changes in foreign exchange rates reported in other income (expense), net. The forward contracts are not designated as hedges and are marked to market through other income (expense), net. Fair value changes in the forward contracts help mitigate the changes in the value of the remeasured receivable and cash balances attributable to changes in foreign exchange rates. The forward contracts are short-term in nature and typically have average maturities at inception of less than three months.
The following tables summarize our outstanding foreign currency forward contracts, by currency, at June 30, 2014 and September 30, 2013:

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June 30, 2014
 
Contract Amount
 
Fair Value
 
Foreign
Currency
 
US$
 
US$
 
(In thousands)
Sell foreign currency:
 
 
 
 
 
 
Canadian dollar (CAD)
CAD 
5,350

 
$
4,990

 
$

Euro (EUR)
EUR 
4,500

 
$
6,161

 
$

Buy foreign currency:
 
 
 
 
 
 
British pound (GBP)
GBP 
11,955

 
$
20,400

 
$

 
September 30, 2013
 
Contract Amount
 
Fair Value
 
Foreign
Currency
 
US$
 
US$
 
(In thousands)
Sell foreign currency:
 
 
 
 
 
 
Canadian dollar (CAD)
CAD 
4,700

 
$
4,542

 
$

Euro (EUR)
EUR 
5,400

 
$
7,307

 
$

Buy foreign currency:
 
 
 
 
 
 
British pound (GBP)
GBP 
6,513

 
$
10,500

 
$

The foreign currency forward contracts were entered into on June 30, 2014 and September 30, 2013, respectively; therefore, their fair value was $0 on each of these dates.
Gains (losses) on derivative financial instruments are recorded in our condensed consolidated statements of income and comprehensive income as a component of other income (expense), net, and consisted of the following:
 
 
Quarter Ended June 30,
 
Nine Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
 
(In thousands)
Foreign currency forward contracts
$
318

 
$
131

 
$
850

 
$
(728
)
5. Goodwill and 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 and comprehensive income, consisted of the following:
 
 
Quarter Ended June 30,
 
Nine Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
 
(In thousands)
Cost of revenues
$
1,880

 
$
1,739

 
$
5,502

 
$
4,883

Selling, general and administrative expenses
1,139

 
1,738

 
3,438

 
5,570

 
$
3,019

 
$
3,477

 
$
8,940

 
$
10,453


Cost of revenues reflects our amortization of completed technology and selling, general and administrative expenses reflects our amortization of other intangible assets. Intangible assets, gross were $142.5 million and $141.2 million as of June 30, 2014 and September 30, 2013, respectively.

Estimated future intangible asset amortization expense associated with intangible assets existing at June 30, 2014, was as follows (in thousands):

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Year Ended September 30,
 
2014 [excluding the nine months ended June 30, 2014]
$
3,010

2015
12,164
2016
11,935
2017
10,773
2018
3,314
Thereafter
10,857

$
52,053

The following table summarizes changes to goodwill during the nine months ended June 30, 2014, both in total and as allocated to our segments:
 
Applications
 
Scores
 
Tools
 
Total
 
(In thousands)
Balance at September 30, 2013
$
559,538

 
$
146,648

 
$
67,745

 
$
773,931

Addition from acquisitions

 

 
5,129

 
5,129

Adjustment related to prior acquisitions
(770
)
 

 

 
(770
)
Foreign currency translation adjustment
7,395

 

 
1,524

 
8,919

Balance at June 30, 2014
$
566,163

 
$
146,648

 
$
74,398

 
$
787,209

6. Composition of Certain Financial Statement Captions
The following table summarizes property and equipment, and the related accumulated depreciation and amortization at June 30, 2014 and September 30, 2013:
 
 
June 30, 2014
 
September 30, 2013
 
(In thousands)
Property and equipment
$
181,556

 
$
174,822

Less: accumulated depreciation and amortization
(144,276
)
 
(129,667
)
 
$
37,280

 
$
45,155

7. Revolving Line of Credit
We have a $200 million unsecured revolving line of credit with a syndicate of banks that expires on September 28, 2016. Proceeds from the credit facility can be used for working capital and general corporate purposes and may also be used for the refinancing of existing debt, acquisitions, and the repurchase 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 1.000% to 1.625% 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 maintaining a maximum consolidated leverage ratio of 3.0 and a minimum fixed charge ratio of 2.5, and also contains other covenants typical of unsecured facilities. As of June 30, 2014, we had $83.0 million in borrowings outstanding at a weighted average interest rate of 1.282% and were in compliance with all financial covenants under this credit facility.
8. Senior Notes
On May 7, 2008, we issued $275 million of senior notes in a private placement to a group of institutional investors (the “2008 Senior Notes”). The 2008 Senior Notes were issued in four series with maturities ranging from 5 to 10 years. The outstanding 2008 Senior Notes’ weighted average interest rate is 7.0% and the weighted average maturity is 9.0 years. On July 14, 2010, we issued $245 million of senior notes in a private placement to a group of institutional investors (the “2010 Senior Notes” and, with the 2008 Senior Notes, the “Senior Notes”). The 2010 Senior Notes were issued in four series with maturities ranging from 6 to 10 years. The 2010 Senior Notes’ weighted average interest rate is 5.2% and the weighted average maturity is 8.0 years. The Senior

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Notes require interest payments semi-annually and also include certain restrictive covenants. As of June 30, 2014, we were in compliance with all financial covenants which include the maintenance of consolidated net debt to consolidated EBITDA ratio and a fixed charge coverage ratio. The issuance of the Senior Notes also required us to make certain covenants typical of unsecured facilities. The carrying value of the Senior Notes was $447.0 million and $455.0 million as of June 30, 2014 and September 30, 2013, respectively. The fair value of the Senior Notes was $463.6 million and $462.4 million as of June 30, 2014 and September 30, 2013, respectively. We measure the fair value of the Senior Notes based on Level 2 inputs, which include quoted market prices and interest rate spreads of similar securities.
9. Restructuring Expenses

During the quarter ended June 30, 2014, we incurred $0.5 million in severance and facilities charges associated with our InfoCentricity acquisition. The following table summarizes our restructuring accruals and certain FICO facility closures. These balances, which are expected to be paid by the end of the second quarter of our fiscal 2015, are recorded in other accrued current liabilities within the accompanying condensed consolidated balance sheets.
 
 
Accrual at
 
Expense
Additions
 
Cash
Payments
 
Accrual at
 
September 30, 2013
 
 
 
June 30, 2014
 
(In thousands)
Facilities charges
$
1,732

 
$
167

 
$
(1,568
)
 
$
331

Employee separation

 
3,963

 
(3,767
)
 
196

 
$
1,732

 
$
4,130

 
$
(5,335
)
 
$
527

10. Income Taxes
Effective Tax Rate
The effective income tax rate was 32.2% and 31.4% during the quarters ended June 30, 2014 and 2013, respectively, and 34.4% and 30.9% during the nine months ended June 30, 2014 and 2013, 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. The effective tax rate in any quarter can also be affected positively or negatively by adjustments that are required to be reported in the specific quarter of resolution. The increase in our effective tax rate year over year was primarily due to the expiration of the U.S. Federal Research and Development credit and a higher percentage of revenue expected in higher taxing jurisdictions.
The total unrecognized tax benefit for uncertain tax positions at June 30, 2014 and September 30, 2013 is estimated to be approximately $6.7 million and $9.0 million, respectively. We recognize interest expense related to unrecognized tax benefits and penalties as part of the provision for income taxes in our condensed consolidated statements of income and comprehensive income. As of June 30, 2014 and September 30, 2013, we have accrued interest of $0.5 million and $0.9 million, respectively, related to unrecognized tax benefits.

11. Earnings Per Share
The following table presents reconciliations for the numerators and denominators of basic and diluted earnings per share (“EPS”) for the quarters and nine months ended June 30, 2014 and 2013:
 

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Quarter Ended June 30,
 
Nine Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
 
(In thousands, except per share data)
Numerator for diluted and basic earnings per share:
 
 
 
 
 
 
 
Net Income
$
20,548

 
$
19,622

 
$
58,276

 
$
61,538

Denominator - share:
 
 
 
 
 
 
 
Basic weighted-average shares
34,210

 
35,499

 
34,458

 
35,400

Effect of dilutive securities
952

 
886

 
962

 
940

Diluted weighted-average shares
35,162

 
36,385

 
35,420

 
36,340

Earnings per share:
 
 
 
 
 
 
 
Basic
$
0.60

 
$
0.55

 
$
1.69

 
$
1.74

Diluted
$
0.58

 
$
0.54

 
$
1.65

 
$
1.69

We exclude the options to purchase shares of common stock in the computation of the diluted EPS where the options’ exercise prices exceed the average market price of our common stock as their inclusion would be antidilutive. There were approximately 14,000 options excluded for the quarter ended June 30, 2014. There were no options excluded for the quarter ended June 30, 2013. There were approximately 9,000 and 145,000 options excluded for the nine months ended June 30, 2014 and 2013, respectively.
12. Segment Information
We are organized into the following three reportable segments to align with internal management of our worldwide business operations based on product offerings.
 
Applications. Our Applications products are pre-configured decision management applications and associated professional services, designed for a specific type of business problem or process, such as marketing, account origination, customer management, fraud and insurance claims management.
Scores. This segment includes our business-to-business scoring solutions, our myFICO® solutions for consumers and associated professional services. 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 clients directly.
Tools. The Tools segment is composed of software tools and associated professional services that clients can use to create their own custom decision management applications.
Our Chief Executive Officer evaluates segment financial performance based on segment revenues and segment operating income. Segment operating expenses consist of direct and indirect costs principally related to personnel, facilities, consulting, travel and depreciation. 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 broad-based incentive expense, share-based compensation expense, restructuring expense, amortization expense, various corporate charges 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 segment’s 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 amounts are allocated to the segments from their internal cost centers as described above. We have recast certain prior period amounts within this note to conform to the way we internally managed and monitored segment performance during the current fiscal year, reflecting immaterial movements of business activities between segments and changes in cost allocations.

The following tables summarize segment information for the quarters and nine months ended June 30, 2014 and 2013:
 

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Quarter Ended June 30, 2014
 
Applications
 
Scores
 
Tools
 
Unallocated
Corporate
Expenses
 
Total
 
(In thousands)
Segment revenues:
 
 
 
 
 
 
 
 
 
Transactional and maintenance
$
78,915

 
$
44,077

 
$
9,262

 
$

 
$
132,254

Professional services
31,898

 
801

 
5,823

 

 
38,522

License
19,043

 
452

 
7,339

 

 
26,834

Total segment revenues
129,856

 
45,330

 
22,424

 

 
197,610

Segment operating expense
(86,413
)
 
(11,444
)
 
(24,923
)
 
(25,424
)
 
(148,204
)
Segment operating income
$
43,443

 
$
33,886

 
$
(2,499
)
 
$
(25,424
)
 
49,406

Unallocated share-based compensation expense
 
 
 
 
 
 
 
 
(9,345
)
Unallocated amortization expense
 
 
 
 
 
 
 
 
(3,019
)
Unallocated restructuring and acquisition-related
 
 
 
 
 
 
 
 
(621
)
Operating income
 
 
 
 
 
 
 
 
36,421

Unallocated interest income
 
 
 
 
 
 
 
 
13

Unallocated interest expense
 
 
 
 
 
 
 
 
(7,064
)
Unallocated other income, net
 
 
 
 
 
 
 
 
931

Income before income taxes
 
 
 
 
 
 
 
 
$
30,301

Depreciation expense
$
3,616

 
$
213

 
$
706

 
$
630

 
$
5,165


 
Quarter Ended June 30, 2013
 
Applications
 
Scores
 
Tools
 
Unallocated
Corporate
Expenses
 
Total
 
(In thousands)
Segment revenues:
 
 
 
 
 
 
 
 
 
Transactional and maintenance
$
75,537

 
$
45,915

 
$
7,970

 
$

 
$
129,422

Professional services
26,230

 
806

 
5,270

 

 
32,306

License
13,216

 
431

 
8,397

 

 
22,044

Total segment revenues
114,983

 
47,152

 
21,637

 

 
183,772

Segment operating expense
(87,688
)
 
(12,977
)
 
(17,569
)
 
(20,004
)
 
(138,238
)
Segment operating income
$
27,295

 
$
34,175

 
$
4,068

 
$
(20,004
)
 
45,534

Unallocated share-based compensation expense
 
 
 
 
 
 
 
 
(6,652
)
Unallocated amortization expense
 
 
 
 
 
 
 
 
(3,477
)
Unallocated restructuring and acquisition-related
 
 
 
 
 
 
 
 
(197
)
Operating income
 
 
 
 
 
 
 
 
35,208

Unallocated interest income
 
 
 
 
 
 
 
 
15

Unallocated interest expense
 
 
 
 
 
 
 
 
(7,432
)
Unallocated other income, net
 
 
 
 
 
 
 
 
830

Income before income taxes
 
 
 
 
 
 
 
 
$
28,621

Depreciation expense
$
3,789

 
$
220

 
$
536

 
$
705

 
$
5,250


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Nine Months Ended June 30, 2014
 
Applications
 
Scores
 
Tools
 
Unallocated
Corporate
Expenses
 
Total
 
(In thousands)
Segment revenues:
 
 
 
 
 
 
 
 
 
Transactional and maintenance
$
233,592

 
$
133,955

 
$
26,731

 
$

 
$
394,278

Professional services
87,058

 
2,167

 
18,202

 

 
107,427

License
36,732

 
4,246

 
24,732

 

 
65,710

Total segment revenues
357,382

 
140,368

 
69,665

 

 
567,415

Segment operating expense
(247,326
)
 
(32,758
)
 
(66,798
)
 
(71,253
)
 
(418,135
)
Segment operating income
$
110,056

 
$
107,610

 
$
2,867

 
$
(71,253
)
 
149,280

Unallocated share-based compensation expense
 
 
 
 
 
 
 
 
(25,631
)
Unallocated amortization expense
 
 
 
 
 
 
 
 
(8,940
)
Unallocated restructuring and acquisition-related
 
 
 
 
 
 
 
 
(4,281
)
Operating income
 
 
 
 
 
 
 
 
110,428

Unallocated interest income
 
 
 
 
 
 
 
 
29

Unallocated interest expense
 
 
 
 
 
 
 
 
(21,305
)
Unallocated other expense, net
 
 
 
 
 
 
 
 
(381
)
Income before income taxes
 
 
 
 
 
 
 
 
$
88,771

Depreciation expense
$
10,714

 
$
623

 
$
1,942

 
$
1,977

 
$
15,256

 
 
Nine Months Ended June 30, 2013
 
Applications
 
Scores
 
Tools
 
Unallocated
Corporate
Expenses
 
Total
 
(In thousands)
Segment revenues:
 
 
 
 
 
 
 
 
 
Transactional and maintenance
$
231,174

 
$
130,558

 
$
24,027

 
$

 
$
385,759

Professional services
79,704

 
3,333

 
15,715

 

 
98,752

License
46,027

 
770

 
21,809

 

 
68,606

Total segment revenues
356,905

 
134,661

 
61,551

 

 
553,117

Segment operating expense
(254,439
)
 
(38,457
)
 
(48,479
)
 
(67,498
)
 
(408,873
)
Segment operating income
$
102,466

 
$
96,204

 
$
13,072

 
$
(67,498
)
 
144,244

Unallocated share-based compensation expense
 
 
 
 
 
 
 
 
(18,897
)
Unallocated amortization expense
 
 
 
 
 
 
 
 
(10,453
)
Unallocated restructuring and acquisition-related
 
 
 
 
 
 
 
 
(3,486
)
Operating income
 
 
 
 
 
 
 
 
111,408

Unallocated interest income
 
 
 
 
 
 
 
 
45

Unallocated interest expense
 
 
 
 
 
 
 
 
(23,167
)
Unallocated other income, net
 
 
 
 
 
 
 
 
765

Income before income taxes
 
 
 
 
 
 
 
 
$
89,051

Depreciation expense
$
10,564

 
$
659

 
$
1,487

 
$
1,997

 
$
14,707



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13. 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 record litigation accruals for legal matters which are both probable and estimable. For legal proceedings for which there is a reasonable possibility of loss (meaning those losses for which the likelihood is more than remote but less than probable), we have determined we do not have material exposure on an aggregate basis.


                                        

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Item 2. Management’s 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, research and development, and the sufficiency of capital resources; (iii) statements of assumptions underlying such statements, including those related to economic conditions; (iv) statements regarding business relationships with vendors, customers or collaborators, including the proportion of revenues generated from international as opposed to domestic customers; 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 Part II, Item 1A, Risk Factors. 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 FICO in fiscal 2014.

OVERVIEW
We provide products and services that enable businesses to automate, improve and connect decisions across the enterprise, an approach we commonly refer to as decision management. Our predictive analytics, which includes the industry-standard FICO® Score, and our decision management systems power hundreds of billions of customer decisions each year. We help thousands of companies in over 90 countries use our decision management technology to target and 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 insurers, retailers, healthcare organizations and public agencies. We also serve consumers through online services that enable people to purchase and understand their FICO® Scores, the standard measure in the United States of consumer credit risk, empowering them to manage their financial health. Most of our solutions address customer engagement, including customer acquisition, customer servicing and management, and customer protection. We also help businesses improve noncustomer decisions such as transaction and claims processing. Our solutions enable users to make decisions that are more precise, consistent and agile, and that systematically advance business goals. This helps our clients to reduce the cost of doing business, increase revenues and profitability, reduce losses from risks and fraud, and increase customer loyalty.
We derive a significant portion of our revenues from clients outside the United States. International revenues accounted for 41% and 39% of total consolidated revenues for the quarters ended June 30, 2014 and 2013, respectively, and 40% and 39% of total consolidated revenues for the nine months ended June 30, 2014 and 2013, respectively. A significant portion of our revenues are derived from the sale of products and services within the banking (including consumer credit) industry, and 72% and 73% of our revenues were derived from within this industry during the quarters ended June 30, 2014 and 2013, respectively, and 74% and 73% of our revenues were derived from within this industry during the nine months ended June 30, 2014 and 2013, respectively. In addition, we derive a significant share of revenue from transactional or unit-based software license fees, transactional fees derived under scoring, network service or internal hosted software arrangements, annual software maintenance fees and annual license fees under long-term software license arrangements. Arrangements with transactional or unit-based pricing accounted for approximately 67% and 70% of our revenues during the quarters ended June 30, 2014 and 2013, respectively. Arrangements with

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transactional or unit-based pricing accounted for approximately 69% and 70% of our revenues during the nine months ended June 30, 2014 and 2013, respectively.

We continue to invest in our franchise technologies, including expansion to the areas of cloud computing and software as a service (“SaaS”). The expansion into cloud-based solutions will enable us to deliver solutions more efficiently to our customers and develop market opportunities outside the banking industry sector. We also continue to enhance shareholder value by returning cash to shareholders through our stock repurchase program. During the quarter and nine months ended June 30, 2014, we repurchased approximately 1.6 million shares for a total value of $94.0 million and 2.8 million shares for a total value of $159.0 million, respectively.
Bookings
Management uses bookings as an indicator of our business performance. Bookings represent contracts signed in the current reporting period that will generate current and future revenue streams. We consider contract terms, knowledge of the marketplace and experience with our customers, among other factors, when determining the estimated value of contract bookings.
Bookings calculations have varying degrees of certainty depending on the revenue type and individual contract terms. Our revenue types are transactional and maintenance, professional services and license. Our estimate of bookings is as of the end of the period in which a contract is signed, and we do not update our initial booking estimates in future periods for changes between estimated and actual results. Actual revenue and the timing thereof could differ materially from our initial estimates. The following paragraphs discuss the key assumptions used to calculate bookings and the susceptibility of these assumptions to variability.
Transactional and Maintenance Bookings
We calculate transactional bookings as the total estimated volume of transactions or number of accounts under contract, multiplied by a contractual rate. Transactional contracts generally span multiple years and require us to make estimates about future transaction volumes or number of active accounts. We develop estimates from discussions with our customers and examinations of historical data from similar products and customer arrangements. Differences between estimated bookings and actual results occur due to variability in the volume of transactions or number of active accounts estimated. This variability is primarily caused by the following:
 
The health of the economy and economic trends in our customers’ industries;
Individual performance of our customers relative to their competitors; and
Regulatory and other factors that affect the business environment in which our customers operate.
We calculate maintenance bookings directly from the terms stated in the contract.
Professional Services Bookings
We calculate professional services bookings as the estimated number of hours to complete a project multiplied by the rate per hour. We estimate the number of hours based on our understanding of the project scope, conversations with customer personnel and our experience in estimating professional services projects. Estimated bookings may differ from actual results primarily due to differences in the actual number of hours incurred. These differences typically result from customer decisions to alter the mix of FICO and internal services resources used to complete a project.
License Bookings
Licenses are sold on a perpetual or term basis and bookings generally equal the fixed amount stated in the contract.

Bookings Trend Analysis

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Bookings
 
Bookings
Yield (1)
 
Number of
Bookings
over $1
Million
 
Weighted-
Average
Term (2)
 
(In millions)
 
 
 
 
 
(Months)
Quarter Ended June 30, 2014
$
84.5

 
18
%
 
14

 
28

Quarter Ended June 30, 2013
$
70.2

 
28
%
 
17

 
23

Nine Months Ended June 30, 2014
$
276.5

 
29
%
 
51

 
NM

Nine Months Ended June 30, 2013
$
236.9

 
36
%
 
43

 
NM

 
(1)
Bookings yield represents the percentage of revenue recognized from bookings for the periods indicated.
(2)
NM – Measure is not meaningful as our estimate of bookings is as of the end of the period in which a contract is signed, and we do not update our initial booking estimates in future periods for changes between estimated and actual results.
Transactional and maintenance bookings were 24% and 28% of total bookings for the quarters ended June 30, 2014 and 2013, respectively. Professional services bookings were 47% and 43% of total bookings for the quarters ended June 30, 2014 and 2013, respectively. License bookings were 29% and 29% of total bookings for the quarters ended June 30, 2014 and 2013, respectively.
Transactional and maintenance bookings were 29% and 36% of total bookings for the nine months ended June 30, 2014 and 2013, respectively. Professional services bookings were 46% and 40% of total bookings for the nine months ended June 30, 2014 and 2013, respectively. License bookings were 25% and 24% of total bookings for the nine months ended June 30, 2014 and 2013, respectively.
The weighted-average term of bookings achieved measures the average term over which the bookings are expected to be recognized as revenue. As the weighted-average term increases, the average amount of revenues expected to be realized in a quarter decreases; however, the revenues are expected to be recognized over a longer period of time. As the weighted-average term decreases, the average amount of revenues expected to be realized in a quarter increases; however, the revenues are expected to be recognized over a shorter period of time.
Management regards the volume of bookings achieved, among other factors, as an important indicator of future revenues, but they are not comparable to, nor substituted for, an analysis of our revenues, and they are subject to a number of risks and uncertainties concerning timing and contingencies affecting product delivery and performance.
Although many of our contracts contain non-cancelable terms, most of our bookings are transactional or service related and are dependent upon estimates such as volume of transactions, number of active accounts, or number of hours incurred. Since these estimates cannot be considered fixed or firm, we do not believe it is appropriate to characterize bookings as backlog.

RESULTS OF OPERATIONS
Revenues
The following tables set forth certain summary information on a segment basis related to our revenues for the quarters and nine months ended June 30, 2014 and 2013:

 

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Quarter Ended June 30,
 
Percentage of Revenues
 
Period-to-Period
 
Period-to-Period
Percentage
Segment
2014
 
2013
 
2014
 
2013
 
Change
 
Change
 
(In thousands)
 
 
 
 
 
(In thousands)
 
 
Applications
$
129,856

 
$
114,983

 
66
%
 
63
%
 
$
14,873

 
13
 %
Scores
45,330

 
47,152

 
23
%
 
25
%
 
(1,822
)
 
(4
)%
Tools
22,424

 
21,637

 
11
%
 
12
%
 
787

 
4
 %
Total
$
197,610

 
$
183,772

 
100
%
 
100
%
 
13,838

 
8
 %
 
 
 
 
 
 
 
Period-to-Period
 
Nine Months Ended June 30,
 
Percentage of Revenues
 
Period-to-Period
 
Percentage
Segment
2014
 
2013
 
2014
 
2013
 
Change
 
Change
 
(In thousands)
 
 
 
 
 
(In thousands)
 
 
Applications
$
357,382

 
$
356,905

 
63
%
 
65
%
 
$
477

 
 %
Scores
140,368

 
134,661

 
25
%
 
24
%
 
5,707

 
4
 %
Tools
69,665

 
61,551

 
12
%
 
11
%
 
8,114

 
13
 %
Total
$
567,415

 
$
553,117

 
100
%
 
100
%
 
14,298

 
3
 %
Quarter Ended June 30, 2014 Compared to Quarter Ended June 30, 2013
Applications
 
Quarter Ended June 30,
 
Period-to-
 
Period-to-
Period
Percentage
 
2014
 
2013
 
Period Change
 
Change
 
(In thousands)
 
(In thousands)
 
 
Transactional and maintenance
$
78,915

 
$
75,537

 
$
3,378

 
4
%
Professional services
31,898

 
26,230

 
5,668

 
22
%
License
19,043

 
13,216

 
5,827

 
44
%
Total
$
129,856

 
$
114,983

 
14,873

 
13
%
Applications segment revenues increased $14.9 million due to a $5.4 million increase in our fraud solutions, a $3.2 million increase in our marketing solutions, a $2.4 million increase in our mobility solutions, a $2.1 million increase in our originations solutions, and a $1.8 million increase in our other solutions.
The increase in fraud solutions revenues was primarily attributable to an increase in software and service revenues. The increase in marketing solutions revenues was primarily attributable to an increase in license revenue, driven by a recently signed large deal to develop customized software solutions for a new customer. The increase in mobility solutions revenues was primarily attributable to an increase in transactional revenues as a result of our growth in the mobile communication space. The increase in originations solutions revenues was primarily attributable to an increase in service revenue.

Scores
 
Quarter Ended June 30,
 
Period-to-
 
Period-to-
Period
Percentage
 
2014
 
2013
 
Period Change
 
Change
 
(In thousands)
 
(In thousands)
 
 
Transactional and maintenance
$
44,077

 
$
45,915

 
$
(1,838
)
 
(4
)%
Professional services
801

 
806

 
(5
)
 
(1
)%
License
452

 
431

 
21

 
5
 %
Total
$
45,330

 
$
47,152

 
(1,822
)
 
(4
)%
Scores segment revenues decreased $1.8 million due to a decrease of $2.4 million in our business-to-business Scores revenue, partially offset by an increase of $0.6 million in our business-to-consumer services revenue. The decrease in our business-to-

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business Scores was primarily attributable to a mix shift toward volumes with lower price points. The increase in business-to-consumer services was primarily attributable to stronger direct sales generated from the myFICO.com website partially offset by a decline in royalties derived from scores sold indirectly to consumers through credit reporting agencies.
During the quarters ended June 30, 2014 and 2013, revenues generated from our agreements with Equifax, TransUnion and Experian collectively accounted for approximately 14% and 17%, respectively, of our total revenues, including revenues from these customers that are recorded in our other segments.
Tools
 
 
Quarter Ended June 30,
 
Period-to-
 
Period-to-
Period
Percentage
 
2014
 
2013
 
Period Change
 
Change
 
(In thousands)
 
(In thousands)
 
 
Transactional and maintenance
$
9,262

 
$
7,970

 
$
1,292

 
16
 %
Professional services
5,823

 
5,270

 
553

 
10
 %
License
7,339

 
8,397

 
(1,058
)
 
(13
)%
Total
$
22,424

 
$
21,637

 
787

 
4
 %
Tools segment revenues increased $0.8 million primarily attributable to an increase in transactional and maintenance revenues, partially offset by a decrease in license revenue.

Nine Months Ended June 30, 2014 Compared to Nine Months Ended June 30, 2013
Applications
 
 
Nine Months Ended June 30,
 
Period-to-
 
Period-to-
Period
Percentage
 
2014
 
2013
 
Period Change
 
Change
 
(In thousands)
 
(In thousands)
 
 
Transactional and maintenance
$
233,592

 
$
231,174

 
$
2,418

 
1
 %
Professional services
87,058

 
79,704

 
7,354

 
9
 %
License
36,732

 
46,027

 
(9,295
)
 
(20
)%
Total
$
357,382

 
$
356,905

 
477

 
 %
Applications segment revenues increased $0.5 million due to an $8.1 million increase in our mobility solutions, a $5.3 million increase in our collections & recovery solutions and a $0.6 million increase in our other solutions, partially offset by an $8.5 million decrease in our fraud solutions and a $5.0 million decrease in our marketing solutions.
The increase in mobility solutions revenues was primarily attributable to an increase in transactional revenues as a result of our growth in the mobile communication space. The increase in collections & recovery solutions revenues was primarily attributable to our CR Software acquisition in November 2012, partially offset by a decrease in revenues generated from our FICO® Debt Manager product. The decrease in fraud solutions revenues was primarily attributable to a decrease in software revenue, largely driven by a couple of multi-year license transactions during the nine months ended June 30, 2013. The decrease in marketing solutions revenues was primarily attributable to the early termination of a large customer in December 2012, partially offset by a recently signed large deal to develop customized software solutions for a new customer.
Scores
 

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Nine Months Ended June 30,
 
Period-to-
 
Period-to-
Period
Percentage
 
2014
 
2013
 
Period Change
 
Change
 
(In thousands)
 
(In thousands)
 
 
Transactional and maintenance
$
133,955

 
$
130,558

 
$
3,397

 
3
 %
Professional services
2,167

 
3,333

 
(1,166
)
 
(35
)%
License
4,246

 
770

 
3,476

 
451
 %
Total
$
140,368

 
$
134,661

 
5,707

 
4
 %
Scores segment revenues increased $5.7 million due to an increase of $1.8 million in our business-to-business Scores revenue, and an increase of $3.9 million in our business-to-consumer services revenue. The increase in our business-to-business Scores was primarily attributable to increased software revenue related to our Global FICO® Score. The increase in business-to-consumer services was primarily attributable to stronger direct sales generated from the myFICO.com website partially offset by a decline in royalties derived from scores sold indirectly to consumers through credit reporting agencies.
During the nine months ended June 30, 2014 and 2013, revenues generated from our agreements with Equifax, TransUnion and Experian collectively accounted for approximately 15% and 16%, respectively, of our total revenues, including revenues from these customers that are recorded in our other segments.

Tools
 
 
Nine Months Ended June 30,
 
Period-to-
 
Period-to-
Period
Percentage
 
2014
 
2013
 
Period Change
 
Change
 
(In thousands)
 
(In thousands)
 
 
Transactional and maintenance
$
26,731

 
$
24,027

 
$
2,704

 
11
%
Professional services
18,202

 
15,715

 
2,487

 
16
%
License
24,732

 
21,809

 
2,923

 
13
%
Total
$
69,665

 
$
61,551

 
8,114

 
13
%
Tools segment revenues increased $8.1 million primarily due to an increase in optimization tools, driven by increased software sales of FICO® Decision Optimizer, as well as increased license and maintenance revenues in models tools.

Operating Expenses and Other Income / Expenses
The following tables set forth certain summary information related to our condensed consolidated statements of income and comprehensive income for the quarters and nine months ended June 30, 2014 and 2013:
 


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Quarter Ended June 30,
 
Percentage of Revenues
 
Period-to-
 
Period-to-
Period
Percentage
 
2014
 
2013
 
2014
 
2013
 
Period Change
 
Change
 
(In thousands, except
employees)
 
 
 
 
 
(In thousands,
except employees)
 
 
Revenues
$
197,610

 
$
183,772

 
100
 %
 
100
 %
 
$
13,838

 
8
 %
Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
Cost of revenues
62,752

 
57,655

 
32
 %
 
32
 %
 
5,097

 
9
 %
Research and development
23,240

 
18,570

 
12
 %
 
10
 %
 
4,670

 
25
 %
Selling, general and administrative
71,557

 
68,665

 
36
 %
 
37
 %
 
2,892

 
4
 %
Amortization of intangible assets
3,019

 
3,477

 
1
 %
 
2
 %
 
(458
)
 
(13
)%
Restructuring and acquisition-related
621

 
197

 
 %
 
 %
 
424

 
215
 %
Total operating expenses
161,189

 
148,564

 
81
 %
 
81
 %
 
12,625

 
8
 %
Operating income
36,421

 
35,208

 
19
 %
 
19
 %
 
1,213

 
3
 %
Interest income
13

 
15

 

 

 
(2
)
 
(13
)%
Interest expense
(7,064
)
 
(7,432
)
 
(4
)%
 
(4
)%
 
368

 
(5
)%
Other income, net
931

 
830

 

 
 %
 
101

 
12
 %
Income before income taxes
30,301

 
28,621

 
15
 %
 
15
 %
 
1,680

 
6
 %
Provision for income taxes
9,753

 
8,999

 
5
 %
 
4
 %
 
754

 
8
 %
Net income
$
20,548

 
$
19,622

 
10
 %
 
11
 %
 
926

 
5
 %
Number of employees at quarter end
2,627

 
2,460

 
 
 
 
 
167

 
7
 %

 
Nine Months Ended June 30,
 
Percentage of Revenues
 
Period-to-
 
Period-to-
Period
Percentage
 
2014
 
2013
 
2014
 
2013
 
Period Change
 
Change
 
(In thousands, except
employees)
 
 
 
 
 
(In thousands,
except employees)
 
 
Revenues
$
567,415

 
$
553,117

 
100
 %
 
100
 %
 
$
14,298

 
3
 %
Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
Cost of revenues
178,254

 
172,659

 
31
 %
 
31
 %
 
5,595

 
3
 %
Research and development
61,022

 
49,143

 
11
 %
 
9
 %
 
11,879

 
24
 %
Selling, general and administrative
204,490

 
205,968

 
36
 %
 
37
 %
 
(1,478
)
 
(1
)%
Amortization of intangible assets
8,940

 
10,453

 
2
 %
 
2
 %
 
(1,513
)
 
(14
)%
Restructuring and acquisition-related
4,281

 
3,486

 
1
 %
 
1
 %
 
795

 
23
 %
Total operating expenses