FICO 10-Q Q3 2015
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, 2015
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 17, 2015 was 31,137,873 (excluding 57,718,910 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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Table of Contents

PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
FAIR ISAAC CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
June 30,
2015
 
September 30,
2014
 
(In thousands, except par value data)
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
84,358

 
$
105,075

Accounts receivable, net
147,304

 
155,295

Prepaid expenses and other current assets
37,428

 
28,157

Total current assets
269,090

 
288,527

Marketable securities available for sale
9,907

 
8,751

Other investments
10,958

 
11,033

Property and equipment, net
38,706

 
36,677

Goodwill
818,952

 
779,928

Intangible assets, net
51,269

 
47,914

Deferred income taxes
9,499

 
13,061

Other assets
7,746

 
6,407

Total assets
$
1,216,127

 
$
1,192,298

Liabilities and Stockholders’ Equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
26,386

 
$
22,000

Accrued compensation and employee benefits
36,648

 
56,650

Other accrued liabilities
29,623

 
36,235

Deferred revenue
54,260

 
56,519

Current maturities on debt
72,000

 
170,000

Total current liabilities
218,917

 
341,404

Long-term debt
576,000

 
376,000

Other liabilities
24,548

 
20,280

Total liabilities
819,465

 
737,684

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 31,137 and 32,047 shares outstanding at June 30, 2015 and September 30, 2014, respectively)
311

 
320

Paid-in-capital
1,140,768

 
1,129,317

Treasury stock, at cost (57,720 and 56,810 shares at June 30, 2015 and September 30, 2014, respectively)
(2,039,050
)
 
(1,936,095
)
Retained earnings
1,335,562

 
1,284,261

Accumulated other comprehensive loss
(40,929
)
 
(23,189
)
Total stockholders’ equity
396,662

 
454,614

Total liabilities and stockholders’ equity
$
1,216,127

 
$
1,192,298


See accompanying notes to condensed consolidated financial statements.

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Table of Contents

FAIR ISAAC CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited)
 
Quarter Ended June 30,
 
Nine Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
 
(In thousands, except per share data)
Revenues:
 
 
 
 
 
 
 
Transactional and maintenance
$
144,695

 
$
132,254

 
$
414,788

 
$
394,278

Professional services
37,998

 
38,522

 
111,142

 
107,427

License
26,673

 
26,834

 
80,095

 
65,710

Total revenues
209,366

 
197,610

 
606,025

 
567,415

Operating expenses:
 
 
 
 
 
 
 
Cost of revenues *
66,202

 
62,752

 
203,493

 
178,254

Research and development
25,610

 
23,240

 
72,588

 
61,022

Selling, general and administrative *
74,645

 
71,557

 
221,309

 
204,490

Amortization of intangible assets *
3,599

 
3,019

 
10,046

 
8,940

Restructuring and acquisition-related
2,256

 
621

 
2,256

 
4,281

Total operating expenses
172,312

 
161,189

 
509,692

 
456,987

Operating income
37,054

 
36,421

 
96,333

 
110,428

Interest expense, net
(7,360
)
 
(7,051
)
 
(22,283
)
 
(21,276
)
Other income (expense), net
770

 
931

 
771

 
(381
)
Income before income taxes
30,464

 
30,301

 
74,821

 
88,771

Provision for income taxes
10,558

 
9,753

 
21,638

 
30,495

Net income
19,906

 
20,548

 
53,183

 
58,276

Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation adjustments
12,779

 
5,705

 
(17,740
)
 
12,603

Comprehensive income
$
32,685

 
$
26,253

 
$
35,443

 
$
70,879

Earnings per share:
 
 
 
 
 
 
 
Basic
$
0.64

 
$
0.60

 
$
1.69

 
$
1.69

Diluted
$
0.62

 
$
0.58

 
$
1.63

 
$
1.65

Shares used in computing earnings per share:
 
 
 
 
 
 
 
Basic
31,118

 
34,210

 
31,465

 
34,458

Diluted
32,363

 
35,162

 
32,648

 
35,420

 
 
* 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, 2014
32,047

 
$
320

 
$
1,129,317

 
$
(1,936,095
)
 
$
1,284,261

 
$
(23,189
)
 
$
454,614

Share-based compensation

 

 
32,762

 

 

 

 
32,762

Issuance of treasury stock under employee stock plans
801

 
8

 
(32,214
)
 
27,747

 

 

 
(4,459
)
Tax effect from share-based payment arrangements

 

 
10,903

 

 

 

 
10,903

Repurchases of common stock
(1,711
)
 
(17
)
 

 
(130,702
)
 

 

 
(130,719
)
Dividends paid

 

 

 

 
(1,882
)
 

 
(1,882
)
Net income

 

 

 

 
53,183

 

 
53,183

Foreign currency translation adjustments

 

 

 

 

 
(17,740
)
 
(17,740
)
Balance at June 30, 2015
31,137

 
$
311

 
$
1,140,768

 
$
(2,039,050
)
 
$
1,335,562

 
$
(40,929
)
 
$
396,662

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,
 
2015
 
2014
 
(In thousands)
Cash flows from operating activities:
 
 
 
Net income
$
53,183

 
$
58,276

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
26,093

 
24,196

Share-based compensation
32,762

 
25,631

Deferred income taxes
75

 
(7,576
)
Tax effect from share-based payment arrangements
10,903

 
5,844

Excess tax benefits from share-based payment arrangements
(11,364
)
 
(5,934
)
Provision for doubtful accounts, net

 
998

Net loss on sales of property and equipment
12

 
3

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
10,609

 
(9,934
)
Prepaid expenses and other assets
(11,309
)
 
1,206

Accounts payable
2,324

 
1,622

Accrued compensation and employee benefits
(19,700
)
 
2,976

Other liabilities
(6,968
)
 
5,532

Deferred revenue
(220
)
 
973

Net cash provided by operating activities
86,400

 
103,813

Cash flows from investing activities:
 
 
 
Purchases of property and equipment
(18,266
)
 
(7,088
)
Cash paid for acquisitions, net of cash acquired
(56,992
)
 
(7,253
)
Distribution from cost method investees
75

 

Net cash used in investing activities
(75,183
)
 
(14,341
)
Cash flows from financing activities:
 
 
 
Proceeds from revolving line of credit
241,000

 
96,000

Payments on revolving line of credit
(68,000
)
 
(28,000
)
Payments on senior notes
(71,000
)
 
(8,000
)
Proceeds from issuance of treasury stock under employee stock plans
13,643

 
18,041

Taxes paid related to net share settlement of equity awards
(18,102
)
 
(10,790
)
Dividends paid
(1,882
)
 
(2,074
)
Repurchases of common stock
(130,719
)
 
(152,329
)
Excess tax benefits from share-based payment arrangements
11,364

 
5,934

Net cash used in financing activities
(23,696
)
 
(81,218
)
Effect of exchange rate changes on cash
(8,238
)
 
1,677

Increase (decrease) in cash and cash equivalents
(20,717
)
 
9,931

Cash and cash equivalents, beginning of period
105,075

 
83,178

Cash and cash equivalents, end of period
$
84,358

 
$
93,109

Supplemental disclosures of cash flow information:
 
 
 
Cash paid for income taxes, net of refunds
$
31,122

 
$
17,174

Cash paid for interest
$
22,835

 
$
21,468

Supplemental disclosures of non-cash investing and financing activities:
 
 
 
Purchase of property and equipment included in accounts payable
$
733

 
$
708

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, telecommunications providers, pharmaceutical companies, healthcare organizations, public agencies and organizations in other industries.
In these condensed consolidated financial statements, Fair Isaac Corporation is referred to as “FICO,” “we,” “us,” “our,” or “the Company.”
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, 2014. 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
We make estimates and assumptions that affect the amounts reported in the financial statements and the disclosures made in the accompanying notes. For example, we use estimates in determining the collectibility of accounts receivable; the appropriate levels of various accruals; labor hours in connection with fixed-fee service contracts; the amount of our tax provision and the realizability of deferred tax assets. We also use estimates in determining the remaining economic lives and carrying values of acquired intangible assets, property and equipment, and other long-lived assets. In addition, we use assumptions to estimate the fair value of reporting units and share-based compensation. Actual results may differ from our estimates.
New Accounting Pronouncements Recently Issued or Adopted
In May 2014, the Financial Accounting Standards Board ("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. In July 2015, the FASB issued guidance to defer the effective date for one year. For public entities, the standard will be effective for annual reporting periods beginning after December 15, 2017 (including interim reporting periods within those periods), which means it will be effective for our fiscal year beginning October 1, 2018. Early adoption is permitted to the original effective date of December 15, 2016 (including interim reporting periods within those periods). 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.


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In April 2015, the FASB issued ASU No. 2015-03, "Simplifying the Presentation of Debt Issuance" ("ASU 2015-03"), which changes the presentation of debt issuance costs in financial statements. Under ASU 2015-03, an entity presents such costs in the balance sheet as a direct deduction from the related debt liability rather than as an asset. Amortization of the costs is reported as interest expense. ASU 2015-03 is effective for fiscal years and interim periods within those fiscal years, beginning after December 15, 2015, which means it will be effective for our fiscal year beginning October 1, 2016. Early adoption is permitted. We do not believe that adoption of ASU 2015-03 will have a significant impact on our consolidated financial statements.


2. Business Combinations
On January 12, 2015, we acquired 100% of the equity of TONBELLER Aktiengesellschaft ("TONBELLER"). TONBELLER is an innovative provider of financial crime and compliance ("FCC") solutions that support the demanding regulatory compliance requirements of more than a thousand banks and commercial organizations. This acquisition will allow us to capitalize on the escalating demand for new, risk-based, integrated FCC solutions.

The purchase price allocation as of the date of the acquisition was based on a preliminary valuation and is subject to revision as more detailed analyses are completed and additional information about the fair value of assets acquired and liabilities assumed become available. The major classes of assets and liabilities to which we have preliminarily allocated the purchase price are as follows:
 
 
(In thousands)
Consideration
 
 
 
 
 
Cash
 
$
59,632

 
 
 
Acquisition-related costs (included in the company’s condensed consolidated statement of income for the nine months ended June 30, 2015 as a component of restructuring and acquisition-related expenses)
 
$
763

 
 
 
Recognized amounts of identifiable assets acquired and liabilities assumed
 
 
 
 
 
Cash and cash equivalents
 
$
2,640

Accounts receivable, net
 
5,389

Prepaid expenses and other current assets
 
209

Intangible assets:
 
 
   Completed technology
 
2,700

   Customer relationships
 
11,600

   Trade names
 
600

Other assets
 
112

Accounts payable
 
(1,118
)
Accrued compensation and employee benefits
 
(1,506
)
Other accrued liabilities
 
(2,838
)
Deferred income taxes
 
(4,349
)
   Total identifiable net assets
 
13,439

 
 
 
Goodwill
 
46,193

Total
 
$
59,632



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The acquired identifiable intangible assets have a weighted average useful life of approximately 4.9 years and are being amortized using the straight-line method over their estimated useful lives as follows: completed technology, five years; customer relationships, five years; and trade names, three years. The goodwill of $46.2 million arising from the acquisition consists largely of the revenue synergies related to market expansion and more rapid innovation for our solutions. The goodwill was allocated to our Applications segment and is not deductible for tax purposes. TONBELLER 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, 2015 and September 30, 2014.
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, 2015 and September 30, 2014.
The following tables represent financial assets that we measured at fair value on a recurring basis at June 30, 2015 and September 30, 2014:
June 30, 2015
Active Markets for
Identical Instruments
(Level 1)
 
Fair Value as of June 30, 2015
 
(In thousands)
Assets:
 
 
 
Cash equivalents (1)
$
439

 
$
439

Marketable securities (2)
9,907

 
9,907

Total
$
10,346

 
$
10,346

 
 
 
 
September 30, 2014
Active Markets for
Identical Instruments
(Level 1)
 
Fair Value as of September 30, 2014
 
(In thousands)
Assets:
 
 
 
Cash equivalents (1)
$
10,326

 
$
10,326

Marketable securities (2)
8,751

 
8,751

Total
$
19,077

 
$
19,077

 
(1)
Included in cash and cash equivalents on our condensed consolidated balance sheet at June 30, 2015 and September 30, 2014. Not included in these tables are cash deposits of $83.9 million and $94.7 million at June 30, 2015 and September 30, 2014, respectively.

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(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, 2015 and September 30, 2014.
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, 2015 and September 30, 2014:
 
June 30, 2015
 
Contract Amount
 
Fair Value
 
Foreign
Currency
 
US$
 
US$
 
(In thousands)
Sell foreign currency:
 
 
 
 
 
 
Canadian dollar (CAD)
CAD 
4,000

 
$
3,208

 
$

Euro (EUR)
EUR 
6,600

 
$
7,389

 
$

Buy foreign currency:
 
 
 
 
 
 
British pound (GBP)
GBP 
4,397

 
$
6,900

 
$

 
September 30, 2014
 
Contract Amount
 
Fair Value
 
Foreign
Currency
 
US$
 
US$
 
(In thousands)
Sell foreign currency:
 
 
 
 
 
 
Canadian dollar (CAD)
CAD 
3,300

 
$
2,960

 
$

Euro (EUR)
EUR 
3,800

 
$
4,790

 
$

Buy foreign currency:
 
 
 
 
 
 
British pound (GBP)
GBP 
6,795

 
$
11,000

 
$


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The foreign currency forward contracts were entered into on June 30, 2015 and September 30, 2014, respectively; therefore, their fair value was $0 on each of these dates.
Gains 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,
 
2015
 
2014
 
2015
 
2014
 
(In thousands)
Gains on foreign currency forward contracts
$
548

 
$
318

 
$
209

 
$
850

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,
 
2015
 
2014
 
2015
 
2014
 
(In thousands)
Cost of revenues
$
1,919

 
$
1,880

 
$
5,656

 
$
5,502

Selling, general and administrative expenses
1,680

 
1,139

 
4,390

 
3,438

 
$
3,599

 
$
3,019

 
$
10,046

 
$
8,940


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 $155.1 million and $142.2 million as of June 30, 2015 and September 30, 2014, respectively.

Estimated future intangible asset amortization expense associated with intangible assets existing at June 30, 2015, was as follows (in thousands):
Year Ended September 30,
 
2015 (excluding the nine months ended June 30, 2015)
$
3,644

2016
14,347

2017
13,220

2018
6,006

2019
5,492

Thereafter
8,560


$
51,269

The following table summarizes changes to goodwill during the nine months ended June 30, 2015, both in total and as allocated to our segments:
 
Applications
 
Scores
 
Tools
 
Total
 
(In thousands)
Balance at September 30, 2014
$
560,295

 
$
146,648

 
$
72,985

 
$
779,928

Addition from acquisitions
46,193

 

 

 
46,193

Foreign currency translation adjustment
(6,277
)
 

 
(892
)
 
(7,169
)
Balance at June 30, 2015
$
600,211

 
$
146,648

 
$
72,093

 
$
818,952


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6. Composition of Certain Financial Statement Captions
The following table summarizes property and equipment, and the related accumulated depreciation and amortization at June 30, 2015 and September 30, 2014:
 
 
June 30,
2015
 
September 30,
2014
 
(In thousands)
Property and equipment
$
112,515

 
$
164,548

Less: accumulated depreciation and amortization
(73,809
)
 
(127,871
)
 
$
38,706

 
$
36,677

7. Revolving Line of Credit
We have a $400 million unsecured revolving line of credit with a syndicate of banks that expires on December 30, 2019. 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, (b) the Federal Funds rate plus 0.500% and (c) the one-month LIBOR rate plus 1.000%, plus, in each case, an applicable margin, or (ii) an adjusted LIBOR rate plus an applicable margin. The applicable margin for base rate borrowings ranges from 0% to 0.875% and for LIBOR borrowings ranges from 1.000% to 1.875%, and is determined based on our consolidated leverage ratio. In addition, we must pay credit facility fees. The credit facility contains certain restrictive covenants including maintaining a minimum fixed charge ratio of 2.5 and a maximum consolidated leverage ratio of 3.0, subject to a step up to 3.5 following certain permitted acquisitions. The credit agreement also contains other covenants typical of unsecured facilities. As of June 30, 2015, we had $272.0 million in borrowings outstanding at a weighted average interest rate of 1.835%, of which $200.0 million was classified as a long-term liability and recorded in long-term debt within the accompanying condensed consolidated balance sheets. We were in compliance with all financial covenants under this credit facility as of June 30, 2015.
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 Series C Note matured on May 7, 2015 and the entire $63.0 million principal balance was repaid. The outstanding 2008 Senior Notes’ weighted average interest rate is 7.2% and the weighted average maturity is 10.0 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 Notes require interest payments semi-annually and also include certain restrictive covenants. As of June 30, 2015, 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 $376.0 million and $447.0 million as of June 30, 2015 and September 30, 2014, respectively. The fair value of the Senior Notes was $403.2 million and $462.7 million as of June 30, 2015 and September 30, 2014, 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, 2015, we incurred $1.5 million in severance charges due to the elimination of 44 positions throughout the company. Cash payments for all the restructuring charges will be paid by the end of the first quarter of our fiscal 2016.
The following table summarizes our restructuring accruals and certain FICO facility closures. The accrual for employee separation is recorded in other accrued current liabilities within the accompanying condensed consolidated balance sheets.
 

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Accrual at
 
Expense
Additions
 
Cash
Payments
 
Accrual at
 
September 30, 2014
 
 
 
June 30, 2015
 
(In thousands)
Facilities charges
$
92

 
$

 
$
(92
)
 
$

Employee separation
170

 
1,493

 
(1,139
)
 
524

 
$
262

 
$
1,493

 
$
(1,231
)
 
$
524

10. Income Taxes
Effective Tax Rate
The effective income tax rate was 34.7% and 32.2% during the quarters ended June 30, 2015 and 2014, respectively and 28.9% and 34.4% during the nine months ended June 30, 2015 and 2014, 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 decrease in our effective tax rate year over year was primarily due to the retroactive extension of the U.S. Federal Research and Development Credit through 2014, which was enacted during the first quarter of our fiscal 2015, as well as lower foreign tax expense.
The total unrecognized tax benefit for uncertain tax positions is estimated to be approximately $5.2 million and $4.6 million at June 30, 2015 and September 30, 2014, 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. We have accrued interest of $0.7 million and $0.5 million, related to unrecognized tax benefits as of June 30, 2015 and September 30, 2014, respectively.

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, 2015 and 2014:
 
 
Quarter Ended June 30,
 
Nine Months Ended June 30,
 
2015
 
2014
 
2015
 
2014
 
(In thousands, except per share data)
Numerator for diluted and basic earnings per share:
 
 
 
 
 
 
 
Net Income
$
19,906

 
$
20,548

 
$
53,183

 
$
58,276

Denominator - share:
 
 
 
 
 
 
 
Basic weighted-average shares
31,118

 
34,210

 
31,465

 
34,458

Effect of dilutive securities
1,245

 
952

 
1,183

 
962

Diluted weighted-average shares
32,363

 
35,162

 
32,648

 
35,420

Earnings per share:
 
 
 
 
 
 
 
Basic
$
0.64

 
$
0.60

 
$
1.69

 
$
1.69

Diluted
$
0.62

 
$
0.58

 
$
1.63

 
$
1.65

We exclude the options to purchase shares of common stock in the computation of the diluted EPS where the options’ exercise price exceeds the average market price of our common stock as their inclusion would be antidilutive. There were no options excluded for the quarter ended June 30, 2015. There were approximately 14,000 options excluded for the quarter ended June 30, 2014. There were approximately 179,850 and 9,000 options excluded for the nine months ended June 30, 2015 and 2014, respectively.
12. Segment Information
We are organized into the following three operating segments, each of which is a reportable segment, to align with internal management of our worldwide business operations based on product offerings.
 

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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.
The following tables summarize segment information for the quarters and nine months ended June 30, 2015 and 2014:
 
 
Quarter Ended June 30, 2015
 
Applications
 
Scores
 
Tools
 
Unallocated
Corporate
Expenses
 
Total
 
(In thousands)
Segment revenues:
 
 
 
 
 
 
 
 
 
Transactional and maintenance
$
79,731

 
$
54,255

 
$
10,709

 
$

 
$
144,695

Professional services
31,009

 
615

 
6,374

 

 
37,998

License
16,394

 
884

 
9,395

 

 
26,673

Total segment revenues
127,134

 
55,754

 
26,478

 

 
209,366

Segment operating expense
(90,228
)
 
(14,736
)
 
(28,554
)
 
(20,773
)
 
(154,291
)
Segment operating income (loss)
$
36,906

 
$
41,018

 
$
(2,076
)
 
$
(20,773
)
 
55,075

Unallocated share-based compensation expense
 
 
 
 
 
 
 
 
(12,166
)
Unallocated amortization expense
 
 
 
 
 
 
 
 
(3,599
)
Unallocated restructuring and acquisition-related
 
 
 
 
 
 
 
 
(2,256
)
Operating income
 
 
 
 
 
 
 
 
37,054

Unallocated interest expense, net
 
 
 
 
 
 
 
 
(7,360
)
Unallocated other income, net
 
 
 
 
 
 
 
 
770

Income before income taxes
 
 
 
 
 
 
 
 
$
30,464

Depreciation expense
$
3,734

 
$
258

 
$
834

 
$
621

 
$
5,447



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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 (loss)
$
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 expense, net
 
 
 
 
 
 
 
 
(7,051
)
Unallocated other income, net
 
 
 
 
 
 
 
 
931

Income before income taxes
 
 
 
 
 
 
 
 
$
30,301

Depreciation expense
$
3,616

 
$
213

 
$
706

 
$
630

 
$
5,165


 
Nine Months Ended June 30, 2015
 
Applications
 
Scores
 
Tools
 
Unallocated
Corporate
Expenses
 
Total
 
(In thousands)
Segment revenues:
 
 
 
 
 
 
 
 
 
        Transactional and maintenance
$
238,597

 
$
145,006

 
$
31,185

 
$

 
$
414,788

        Professional services
90,500

 
2,369

 
18,273

 

 
111,142

        License
47,923

 
2,257

 
29,915

 

 
80,095

              Total segment revenues
377,020

 
149,632

 
79,373

 

 
606,025

Segment operating expense
(274,157
)
 
(42,246
)
 
(86,080
)
 
(62,145
)
 
(464,628
)
              Segment operating income (loss)
$
102,863

 
$
107,386

 
$
(6,707
)
 
$
(62,145
)
 
141,397

Unallocated share-based compensation expense
 
 
 
 
 
 
 
 
(32,762
)
Unallocated amortization expense
 
 
 
 
 
 
 
 
(10,046
)
Unallocated restructuring and acquisition-related
 
 
 
 
 
 
 
 
(2,256
)
Operating income
 
 
 
 
 
 
 
 
96,333

Unallocated interest expense, net
 
 
 
 
 
 
 
 
(22,283
)
Unallocated other income, net
 
 
 
 
 
 
 
 
771

Income before income taxes
 
 
 
 
 
 
 
 
$
74,821

Depreciation expense
$
10,948

 
$
702

 
$
2,424

 
$
1,973

 
$
16,047



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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 expense, net
 
 
 
 
 
 
 
 
(21,276
)
Unallocated other expense, net
 
 
 
 
 
 
 
 
(381
)
Income before income taxes
 
 
 
 
 
 
 
 
$
88,771

Depreciation expense
$
10,714

 
$
623

 
$
1,942

 
$
1,977

 
$
15,256


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 us in fiscal 2015.

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 100 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, telecommunications providers, pharmaceutical companies, healthcare organizations, public agencies and organizations in other industries. We also serve consumers through online services that enable people to purchase and understand their FICO® Scores, the standard measure in the U.S. 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.

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Table of Contents

We derive a significant portion of our revenues from clients outside the U.S. International revenues accounted for 38% and 41% of total consolidated revenues for the quarters ended June 30, 2015 and 2014, respectively, and 39% and 40% of total consolidated revenues for the nine months ended June 30, 2015 and 2014, respectively. A significant portion of our revenues are derived from the sale of products and services within the banking (including consumer credit) industry, and 66% and 72% of our revenues were derived from within this industry during the quarters ended June 30, 2015 and 2014, respectively, and 67% and 74% of our revenues were derived from within this industry during the nine months ended June 30, 2015 and 2014, 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 69% and 67% of our revenues during the quarters ended June 30, 2015 and 2014, respectively. Arrangements with transactional or unit-based pricing accounted for approximately 68% and 69% of our revenues during the nine months ended June 30, 2015 and 2014, respectively.

We continue to invest in growth initiatives that expand our addressable markets. For our Scores segment, we introduced the FICO® Score Open Access program in fiscal 2014 which allows our participating clients to provide their customers with a free FICO® Score along with materials to help them understand what affects their score. We now have more than 69 million consumer accounts with access to their free score through the FICO® Score Open Access program and with the addition of new participants we expect this to grow to more than 135 million. On December 29, 2014, we announced the FICO® Score is now available to consumers through Experian, a leading global information services provider. Consumers can go to Experian to access the credit score lenders use most when determining applicant eligibility for new credit cards, car loans, mortgages or other lines of credit.

We introduced a full suite of applications for the FICO® Analytic Cloud in fiscal 2014 and continue to invest in the areas of cloud computing and software as a service (“SaaS”). Through the expansion of our product offerings in our Applications and Tools segments, we can accommodate small-to-midsize companies that benefit from the affordability and simplicity of cloud-based solutions.

We continue to make acquisitions that deliver solutions to the financial services industry and adjacent vertical industries; our latest acquisition of TONBELLER was consummated to address the rapidly growing demand for integrated, enterprise-class financial crime and compliance solutions. 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, 2015, we repurchased approximately 0.3 million shares for a total value of $30.0 million and 1.7 million shares for a total value of $130.7 million, respectively.
Bookings
Management uses bookings as an indicator of our business performance. Bookings represent contracts signed in the current reporting period that 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 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 the 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

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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 customer 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
 
Bookings
 
Bookings
Yield (1)
 
Number of
Bookings
over $1
Million
 
Weighted-
Average
Term (2)
 
(In millions)
 
 
 
 
 
(Months)
Quarter Ended June 30, 2015
$
60.2

 
27
%
 
11

 
21

Quarter Ended June 30, 2014
$
84.5

 
18
%
 
14

 
28

Nine Months Ended June 30, 2015
$
209.4

 
45
%
 
39

 
NM

Nine Months Ended June 30, 2014
$
276.5

 
29
%
 
51

 
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 25% and 24% of total bookings for the quarters ended June 30, 2015 and 2014, respectively. Professional services bookings were 49% and 47% of total bookings for the quarters ended June 30, 2015 and 2014, respectively. License bookings were 26% and 29% of total bookings for the quarters ended June 30, 2015 and 2014, respectively.
Transactional and maintenance bookings were 25% and 29% of total bookings for the nine months ended June 30, 2015 and 2014, respectively. Professional services bookings were 49% and 46% of total bookings for the nine months ended June 30, 2015 and 2014, respectively. License bookings were 26% and 25% of total bookings for the nine months ended June 30, 2015 and 2014, 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.


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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, 2015 and 2014:

 
 
Quarter Ended June 30,
 
Percentage of Revenues
 
Period-to-Period
 
Period-to-Period
Percentage
Segment
2015
 
2014
 
2015
 
2014
 
Change
 
Change
 
(In thousands)
 
 
 
 
 
(In thousands)
 
 
Applications
$
127,134

 
$
129,856

 
61
%
 
66
%
 
$
(2,722
)
 
(2
)%
Scores
55,754

 
45,330

 
26
%
 
23
%
 
10,424

 
23
 %
Tools
26,478

 
22,424

 
13
%
 
11
%
 
4,054

 
18
 %
Total
$
209,366

 
$
197,610

 
100
%
 
100
%
 
11,756

 
6
 %
 
 
 
 
 
 
 
Period-to-Period
 
Nine Months Ended June 30,
 
Percentage of Revenues
 
Period-to-Period
 
Percentage
Segment
2015
 
2014
 
2015
 
2014
 
Change
 
Change
 
(In thousands)
 
 
 
 
 
(In thousands)
 
 
Applications
$
377,020

 
$
357,382

 
62
%
 
63
%
 
$
19,638

 
5
 %
Scores
149,632

 
140,368

 
25
%
 
25
%
 
9,264

 
7
 %
Tools
79,373

 
69,665

 
13
%
 
12
%
 
9,708

 
14
 %
Total
$
606,025

 
$
567,415

 
100
%
 
100
%
 
38,610

 
7
 %
Quarter Ended June 30, 2015 Compared to Quarter Ended June 30, 2014
Applications
 
Quarter Ended June 30,
 
Period-to-
 
Period-to-
Period
Percentage
 
2015
 
2014
 
Period Change
 
Change
 
(In thousands)
 
(In thousands)
 
 
Transactional and maintenance
$
79,731

 
$
78,915

 
$
816

 
1
 %
Professional services
31,009

 
31,898

 
(889
)
 
(3
)%
License
16,394

 
19,043

 
(2,649
)
 
(14
)%
Total
$
127,134

 
$
129,856

 
(2,722
)
 
(2
)%
Applications segment revenues decreased $2.7 million primarily due to a $4.3 million decrease in our marketing solutions and a $3.1 million decrease in our fraud solutions, partially offset by a $4.5 million increase in our compliance solutions. The decrease in marketing solutions was primarily attributable to a decrease in license revenue, driven by a large deal to develop customized software solutions for a customer during the quarter ended June 30, 2014. The decrease in fraud solutions revenues was primarily attributable to a decrease in software and service revenues. The increase in compliance solutions was attributable to our acquisition of TONBELLER in January 2015.










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Table of Contents

Scores

 
Quarter Ended June 30,
 
Period-to-
 
Period-to-
Period
Percentage
 
2015
 
2014
 
Period Change
 
Change
 
(In thousands)
 
(In thousands)
 
 
Transactional and maintenance
$
54,255

 
$
44,077

 
$
10,178

 
23
 %
Professional services
615

 
801

 
(186
)
 
(23
)%
License
884

 
452

 
432

 
96
 %
Total
$
55,754

 
$
45,330

 
10,424

 
23
 %
Scores segment revenues increased $10.4 million due to an increase of $8.7 million in our business-to-consumer services revenue and an increase of $1.7 million in our business-to-business Scores revenue. The increase in business-to-consumer services was primarily attributable to revenue generated from the agreement with Experian that launched in December 2014 and made FICO® Scores available to consumers on Experian.com. The increase in our business-to-business Scores was primarily attributable to an increase in our transactional scores driven by new originations.
During the quarters ended June 30, 2015 and 2014, revenues generated from our agreements with Equifax, TransUnion and Experian collectively accounted for approximately 18% and 14%, respectively, of our total revenues, including revenues from these customers recorded in our other segments.
Tools
 
 
Quarter Ended June 30,
 
Period-to-
 
Period-to-
Period
Percentage
 
2015
 
2014
 
Period Change
 
Change
 
(In thousands)
 
(In thousands)
 
 
Transactional and maintenance
$
10,709

 
$
9,262

 
$
1,447

 
16
%
Professional services
6,374

 
5,823

 
551

 
9
%
License
9,395

 
7,339

 
2,056

 
28
%
Total
$
26,478

 
$
22,424

 
4,054

 
18
%
Tools segment revenues increased $4.1 million primarily attributable to an increase in license revenue driven by sales of our Blaze and Model Central software, as well as an increase in transactional and maintenance revenue.

Nine Months Ended June 30, 2015 Compared to Nine Months Ended June 30, 2014
Applications

 
Nine Months Ended June 30,
 
Period-to-
 
Period-to-
Period
Percentage
 
2015
 
2014
 
Period Change
 
Change
 
(In thousands)
 
(In thousands)
 
 
Transactional and maintenance
$
238,597

 
$
233,592

 
$
5,005

 
2
%
Professional services
90,500

 
87,058

 
3,442

 
4
%
License
47,923

 
36,732

 
11,191

 
30
%
Total
$
377,020

 
$
357,382

 
19,638

 
5
%

19

Table of Contents

Applications segment revenues increased $19.6 million primarily due to a $13.2 million increase in our fraud solutions, mainly driven by a couple of multi-year license transactions during the nine months ended June 30, 2015. In addition, we had a $7.7 million increase in our compliance solutions which was attributable to our acquisition of TONBELLER in January 2015.
Scores
 
 
Nine Months Ended June 30,
 
Period-to-
 
Period-to-
Period
Percentage
 
2015
 
2014
 
Period Change
 
Change
 
(In thousands)
 
(In thousands)
 
 
Transactional and maintenance
$
145,006

 
$
133,955

 
$
11,051

 
8
 %
Professional services
2,369

 
2,167

 
202

 
9
 %
License
2,257

 
4,246

 
(1,989
)
 
(47
)%
Total
$
149,632

 
$
140,368

 
9,264

 
7
 %
Scores segment revenues increased $9.3 million due to an increase of $11.0 million in our business-to-consumer services revenue, partially offset by a decrease of $1.7 million in our business-to-business Scores revenue. The increase in business-to-consumer services was primarily attributable to revenue generated from the agreement with Experian that launched in December 2014 and made FICO® Score available to consumers on Experian.com. The decrease in our business-to-business Scores was primarily attributable to decreased software revenue related to our Global FICO® Score, and a royalty true-up during the nine months ended June 30, 2014, partially offset by an increase in our transactional scores driven by new originations.
During the nine months ended June 30, 2015 and 2014, revenues generated from our agreements with Equifax, TransUnion and Experian collectively accounted for approximately 16% and 15%, 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
 
2015
 
2014
 
Period Change
 
Change
 
(In thousands)
 
(In thousands)
 
 
Transactional and maintenance
$
31,185

 
$
26,731

 
$
4,454

 
17
%
Professional services
18,273

 
18,202

 
71

 
%
License
29,915

 
24,732

 
5,183

 
21
%
Total
$
79,373

 
$
69,665

 
9,708

 
14
%
Tools segment revenues increased $9.7 million due to an increase in license revenue primarily attributable to a one-time settlement with a customer related to under-reported royalties from a multi-year period, as well as an increase in transactional and maintenance revenue, primarily attributable to our acquisition of InfoCentricity in April 2014.
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, 2015 and 2014:
 


20

Table of Contents

 
Quarter Ended June 30,
 
Percentage of Revenues
 
Period-to-
 
Period-to-
Period
Percentage
 
2015
 
2014
 
2015
 
2014
 
Period Change
 
Change
 
(In thousands, except
employees)
 
 
 
 
 
(In thousands,
except employees)
 
 
Revenues
$
209,366

 
$
197,610

 
100
 %
 
100
 %
 
$
11,756

 
6
 %
Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
Cost of revenues
66,202

 
62,752

 
31
 %
 
32
 %
 
3,450

 
5
 %
Research and development
25,610

 
23,240

 
12
 %
 
12
 %
 
2,370

 
10
 %
Selling, general and administrative
74,645

 
71,557

 
36
 %
 
36
 %
 
3,088

 
4
 %
Amortization of intangible assets
3,599

 
3,019

 
2
 %
 
1
 %
 
580

 
19
 %
Restructuring and acquisition-related
2,256

 
621

 
1
 %
 
 %
 
1,635

 
263
 %
Total operating expenses
172,312

 
161,189

 
82
 %
 
81
 %
 
11,123

 
7
 %
Operating income
37,054

 
36,421

 
18
 %
 
19
 %
 
633

 
2
 %
Interest expense, net
(7,360
)
 
(7,051
)
 
(3
)%
 
(4
)%
 
(309
)
 
4
 %
Other income, net
770

 
931

 
 %
 
 %
 
(161
)
 
(17
)%
Income before income taxes
30,464

 
30,301

 
15
 %
 
15
 %
 
163

 
1
 %
Provision for income taxes
10,558

 
9,753

 
5
 %
 
5
 %
 
805

 
8
 %
Net income
$
19,906

 
$
20,548

 
10
 %
 
10
 %
 
(642
)
 
(3
)%
Number of employees at quarter end
2,810

 
2,627

 
 
 
 
 
183

 
7
 %

 
Nine Months Ended June 30,
 
Percentage of Revenues
 
Period-to-
 
Period-to-
Period
Percentage
 
2015
 
2014
 
2015
 
2014
 
Period Change
 
Change
 
(In thousands)
 
 
 
 
 
(In thousands)
 
 
Revenues
$
606,025

 
$
567,415

 
100
 %
 
100
 %
 
$
38,610

 
7
 %
Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
Cost of revenues
203,493

 
178,254

 
34
 %
 
31
 %
 
25,239

 
14
 %
Research and development
72,588

 
61,022

 
12
 %
 
11
 %
 
11,566

 
19
 %
Selling, general and administrative
221,309

 
204,490

 
36
 %
 
36
 %
 
16,819

 
8
 %
Amortization of intangible assets
10,046

 
8,940

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