Document
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 March 31, 2017
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, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth 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
 
 
 
 
 
 
Emerging Growth 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
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
The number of shares of common stock outstanding on April 14, 2017 was 30,965,124 (excluding 57,891,659 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.
 



i

Table of Contents

PART I – FINANCIAL INFORMATION
Item 1. Financial Statements
FAIR ISAAC CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
 
March 31,
2017
 
September 30,
2016
 
(In thousands, except par value data)
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
115,848

 
$
75,926

Accounts receivable, net
141,394

 
167,786

Prepaid expenses and other current assets
51,987

 
23,926

Total current assets
309,229

 
267,638

Marketable securities available for sale
12,224

 
11,016

Other investments
10,920

 
10,920

Property and equipment, net
42,728

 
45,122

Goodwill
792,420

 
798,415

Intangible assets, net
26,311

 
33,619

Deferred income taxes
47,761

 
47,598

Other assets
5,475

 
6,348

Total assets
$
1,247,068

 
$
1,220,676

Liabilities and Stockholders’ Equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
18,692

 
$
22,952

Accrued compensation and employee benefits
48,154

 
71,216

Other accrued liabilities
25,527

 
27,780

Deferred revenue
64,906

 
47,129

Current maturities on debt
107,000

 
77,000

Total current liabilities
264,279

 
246,077

Long-term debt
518,720

 
493,624

Other liabilities
36,968

 
34,147

Total liabilities
819,967

 
773,848

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 30,962 and 30,935 shares outstanding at March 31, 2017 and September 30, 2016, respectively)
310

 
309

Paid-in-capital
1,162,936

 
1,185,076

Treasury stock, at cost (57,895 and 57,922 shares at March 31, 2017 and September 30, 2016, respectively)
(2,187,837
)
 
(2,136,760
)
Retained earnings
1,536,961

 
1,475,214

Accumulated other comprehensive loss
(85,269
)
 
(77,011
)
Total stockholders’ equity
427,101

 
446,828

Total liabilities and stockholders’ equity
$
1,247,068

 
$
1,220,676


See accompanying notes.

1

Table of Contents

FAIR ISAAC CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(Unaudited)

 
Quarter Ended March 31,
 
Six Months Ended March 31,
 
2017
 
2016
 
2017
 
2016
 
(In thousands, except per share data)
Revenues:
 
 
 
 
 
 
 
Transactional and maintenance
$
161,249

 
$
150,743

 
$
314,909

 
$
297,815

Professional services
41,284

 
39,342

 
84,827

 
73,494

License
25,845

 
16,593

 
48,242

 
35,445

Total revenues
228,378

 
206,678

 
447,978

 
406,754

Operating expenses:
 
 
 
 
 
 
 
Cost of revenues *
72,131

 
62,298

 
142,128

 
124,491

Research and development
26,663

 
24,848

 
52,805

 
49,479

Selling, general and administrative *
86,231

 
77,501

 
171,445

 
156,339

Amortization of intangible assets *
3,312

 
3,507

 
6,632

 
7,087

Total operating expenses
188,337

 
168,154

 
373,010

 
337,396

Operating income
40,041

 
38,524

 
74,968

 
69,358

Interest expense, net
(6,578
)
 
(6,815
)
 
(12,750
)
 
(13,539
)
Other income (expense), net
(327
)
 
435

 
(427
)
 
101

Income before income taxes
33,136

 
32,144

 
61,791

 
55,920

Provision for income taxes
8,052

 
9,028

 
(1,194
)
 
13,563

Net income
25,084

 
23,116

 
62,985

 
42,357

Other comprehensive income (loss):
 
 
 
 
 
 
 
Foreign currency translation adjustments
6,089

 
(905
)
 
(8,258
)
 
(7,024
)
Comprehensive income
$
31,173

 
$
22,211

 
$
54,727

 
$
35,333

Earnings per share:
 
 
 
 
 
 
 
Basic
$
0.81

 
$
0.74

 
$
2.03

 
$
1.36

Diluted
$
0.78

 
$
0.72

 
$
1.94

 
$
1.31

Shares used in computing earnings per share:
 
 
 
 
 
 
 
Basic
31,017

 
31,268

 
31,003

 
31,226

Diluted
32,260

 
32,262

 
32,398

 
32,349

 
 
* Cost of revenues and selling, general and administrative expenses exclude the amortization of intangible assets. See Note 4.
See accompanying notes.


2

Table of Contents

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, 2016
30,935

 
$
309

 
$
1,185,076

 
$
(2,136,760
)
 
$
1,475,214

 
$
(77,011
)
 
$
446,828

Share-based compensation

 

 
29,231

 

 

 

 
29,231

Issuance of treasury stock under employee stock plans
633

 
7

 
(51,371
)
 
23,564

 

 

 
(27,800
)
Repurchases of common stock
(606
)
 
(6
)
 

 
(74,641
)
 

 

 
(74,647
)
Dividends paid

 

 

 

 
(1,238
)
 

 
(1,238
)
Net income

 

 

 

 
62,985

 

 
62,985

Foreign currency translation adjustments

 

 

 

 

 
(8,258
)
 
(8,258
)
Balance at March 31, 2017
30,962

 
$
310

 
$
1,162,936

 
$
(2,187,837
)
 
$
1,536,961

 
$
(85,269
)
 
$
427,101

See accompanying notes.


3

Table of Contents

FAIR ISAAC CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

 
Six Months Ended March 31,
 
2017
 
2016
 
(In thousands)
Cash flows from operating activities:
 
 
 
Net income
$
62,985

 
$
42,357

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
18,236

 
15,168

Share-based compensation
29,231

 
28,300

Deferred income taxes

 
(2,056
)
Tax effect from share-based payment arrangements

 
13,508

Provision for doubtful accounts, net
925

 
870

Net loss on sales of property and equipment
10

 

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
23,710

 
566

Prepaid expenses and other assets
(27,415
)
 
532

Accounts payable
(3,534
)
 
233

Accrued compensation and employee benefits
(22,671
)
 
(9,836
)
Other liabilities
(3,487
)
 
(6,901
)
Deferred revenue
21,407

 
9,593

Net cash provided by operating activities
99,397

 
92,334

Cash flows from investing activities:
 
 
 
Purchases of property and equipment
(9,604
)
 
(7,807
)
Net cash used in investing activities
(9,604
)
 
(7,807
)
Cash flows from financing activities:
 
 
 
Proceeds from revolving line of credit
79,000

 
44,000

Payments on revolving line of credit
(24,000
)
 
(41,000
)
Proceeds from issuance of treasury stock under employee stock plans
9,114

 
6,757

Taxes paid related to net share settlement of equity awards
(36,914
)
 
(25,881
)
Dividends paid
(1,238
)
 
(1,245
)
Repurchases of common stock
(74,647
)
 
(68,390
)
Net cash used in financing activities
(48,685
)
 
(85,759
)
Effect of exchange rate changes on cash
(1,186
)
 
486

Increase (decrease) in cash and cash equivalents
39,922

 
(746
)
Cash and cash equivalents, beginning of period
75,926

 
86,120

Cash and cash equivalents, end of period
$
115,848

 
$
85,374

Supplemental disclosures of cash flow information:
 
 
 
Cash paid for income taxes, net of refunds
$
21,557

 
$
2,648

Cash paid for interest
$
12,377

 
$
13,273

Supplemental disclosures of non-cash investing and financing activities:
 
 
 
Purchase of property and equipment included in accounts payable
$
2,757

 
$
1,028


See accompanying notes.

4

Table of Contents

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, 2016. 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 Adopted Accounting Pronouncements
Effective October 1, 2016, we early adopted ASU No. 2016-09, “Compensation - Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting” (“ASU 2016-09”). ASU 2016-09 simplifies several aspects of the accounting for share-based payment transactions, including income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. As a result of the adoption, we recognized $3.6 million and $20.9 million of excess tax benefits related to share-based payments in our provision for income taxes for the quarter and six months ended March 31, 2017, respectively. These items were historically recorded as additional paid-in capital. We elected to apply the change retrospectively in presentation to our condensed consolidated statements of cash flows and no longer classified the excess tax benefits from employee stock plans as a reduction from operating cash flows, which resulted in increases to both net cash provided by operating activities and net cash used in financing activities of $14.0 million for the six months ended March 31, 2016. Our adoption of ASU 2016-09 also impacted the calculation of diluted weighted-average shares under the treasury stock method as we no longer increase or decrease the assumed proceeds from an employee vesting in, or exercising, a share-based payment award by the amount of excess tax benefits or deficiencies taken to additional paid-in capital. For the quarter and six months ended March 31, 2017, the impact was immaterial. Given our historical practice of including employee withholding taxes paid within financing activities in the statement of cash flows, no prior period reclassifications are required by the clarifications on classification provided by ASU 2016-09. Furthermore, we elected to continue to estimate expected forfeitures of employee equity awards to determine the amount of compensation expense to be recognized in each period.

5

Table of Contents

Effective October 1, 2016, we retrospectively adopted ASU No. 2015-03, “Simplifying the Presentation of Debt Issuance” (“ASU 2015-03”). ASU 2015-03 requires an entity to present debt issuance costs related to a recognized debt liability, other than those relating to line-of-credit arrangements, in the balance sheet as a direct deduction from the related debt liability rather than as an asset. As a result of the adoption, at March 31, 2017, the amount of debt issuance costs reflected as a deduction of long-term debt was $0.3 million. At September 30, 2016, the amount of debt issuance costs reclassified from other assets to a deduction of long-term debt was $0.4 million.
Recent Accounting Pronouncements Not Yet 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 August 2015, the FASB issued ASU No. 2015-14, “Deferral of the Effective Date” (“ASU 2015-14”), which defers the effective date for ASU 2014-09 by one year. For public entities, the guidance in ASU 2014-09 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). In March 2016, the FASB issued ASU No. 2016-08, “Principal versus Agent Considerations (Reporting Revenue versus Net)” (“ASU 2016-08”), which clarifies the implementation guidance on principal versus agent considerations in the new revenue recognition standard. In April 2016, the FASB issued ASU No. 2016-10, “Identifying Performance Obligations and Licensing” (“ASU 2016-10”), which reduces the complexity when applying the guidance for identifying performance obligations and improves the operability and understandability of the license implementation guidance. In May 2016, the FASB issued ASU No. 2016-12 “Narrow-Scope Improvements and Practical Expedients” (“ASU 2016-12”), which amends the guidance on transition, collectability, noncash consideration and the presentation of sales and other similar taxes. In December 2016, the FASB further issued ASU 2016-20, “Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers” (“ASU 2016-20”), which makes minor corrections or minor improvements to the Codification that are not expected to have a significant effect on current accounting practice or create a significant administrative cost to most entities. The amendments are intended to address implementation issues that were raised by stakeholders and provide additional practical expedients to reduce the cost and complexity of applying the new revenue standard. These amendments have the same effective date as the new revenue standard. Preliminarily, we plan to adopt Topic 606 in the first quarter of our fiscal 2019 using the retrospective transition method, and are continuing to evaluate the impact our pending adoption of Topic 606 will have on our consolidated financial statements.
In October 2016, the FASB issued ASU No. 2016-16, “Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory (“ASU 2016-16”). ASU 2016-16 requires an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The guidance is effective for fiscal years and interim periods beginning after December 15, 2017, which means it will be effective for our fiscal year beginning October 1, 2018. ASU 2016-16 should be applied on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings at the beginning of the period of adoption. Early adoption is permitted in the first interim period of an entity's annual financial statements. We are currently evaluating the timing of our adoption and the impact that the updated standard will have on our consolidated financial statements.
In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)” (“ASU 2016-02”), which requires lessees to put most leases on their balance sheets but recognize the expenses on their income statements in a manner similar to current practice. ASU 2016-02 states that a lessee would recognize a lease liability for the obligation to make lease payments and a right-to-use asset for the right to use the underlying asset for the lease term. ASU 2016-02 is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2018, which means it will be effective for our fiscal year beginning October 1, 2019. Early adoption is permitted. We are currently evaluating the timing of our adoption and the impact that the updated standard will have on our consolidated financial statements.
2. 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 March 31, 2017 and September 30, 2016.
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 March 31, 2017 and September 30, 2016.
The following tables represent financial assets that we measured at fair value on a recurring basis at March 31, 2017 and September 30, 2016:
March 31, 2017
Active Markets for
Identical Instruments
(Level 1)
 
Fair Value as of March 31, 2017
 
(In thousands)
Assets:
 
 
 
Cash equivalents (1)
$
441

 
$
441

Marketable securities (2)
12,224

 
12,224

Total
$
12,665

 
$
12,665

 
 
 
 
September 30, 2016
Active Markets for
Identical Instruments
(Level 1)
 
Fair Value as of September 30, 2016
 
(In thousands)
Assets:
 
 
 
Cash equivalents (1)
$
440

 
$
440

Marketable securities (2)
11,016

 
11,016

Total
$
11,456

 
$
11,456

 
(1)
Included in cash and cash equivalents on our condensed consolidated balance sheet at March 31, 2017 and September 30, 2016. Not included in these tables are cash deposits of $115.4 million and $75.5 million at March 31, 2017 and September 30, 2016, 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 March 31, 2017 and September 30, 2016.
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 3 and Note 7, respectively.

6

Table of Contents

3. 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 and Euro.
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 March 31, 2017 and September 30, 2016:
 
March 31, 2017
 
Contract Amount
 
Fair Value
 
Foreign
Currency
 
US$
 
US$
 
(In thousands)
Sell foreign currency:
 
 
 
 
 
 
Euro (EUR)
EUR 
5,700

 
$
6,113

 
$

Buy foreign currency:
 
 
 
 
 
 
British pound (GBP)
GBP 
4,479

 
$
5,600

 
$

 
September 30, 2016
 
Contract Amount
 
Fair Value
 
Foreign
Currency
 
US$
 
US$
 
(In thousands)
Sell foreign currency:
 
 
 
 
 
 
Euro (EUR)
EUR 
7,850

 
$
8,743

 
$

Buy foreign currency:
 
 
 
 
 
 
British pound (GBP)
GBP 
7,721

 
$
10,000

 
$

The foreign currency forward contracts were entered into on March 31, 2017 and September 30, 2016, 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 March 31,
 
Six Months Ended March 31,
 
2017
 
2016
 
2017
 
2016
 
(In thousands)
Gains (losses) on foreign currency forward contracts
$
55

 
$
(956
)
 
$
(505
)
 
$
(1,255
)

7

Table of Contents

4. 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 March 31,
 
Six Months Ended March 31,
 
2017
 
2016
 
2017
 
2016
 
(In thousands)
Cost of revenues
$
1,687

 
$
1,840

 
$
3,373

 
$
3,747

Selling, general and administrative expenses
1,625

 
1,667

 
3,259

 
3,340

 
$
3,312

 
$
3,507

 
$
6,632

 
$
7,087


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 $147.8 million and $149.4 million as of March 31, 2017 and September 30, 2016, respectively.

Estimated future intangible asset amortization expense associated with intangible assets existing at March 31, 2017 was as follows (in thousands):
Year Ended September 30,
 
2017 (excluding the six months ended March 31, 2017)
$
5,923

2018
6,254

2019
5,741

2020
3,555

2021
2,382

Thereafter
2,456


$
26,311

The following table summarizes changes to goodwill during the six months ended March 31, 2017, both in total and as allocated to our segments:
 
Applications
 
Scores
 
Decision Management Software
 
Total
 
(In thousands)
Balance at September 30, 2016
$
582,720

 
$
146,648

 
$
69,047

 
$
798,415

Foreign currency translation adjustment
(5,538
)
 

 
(457
)
 
(5,995
)
Balance at March 31, 2017
$
577,182

 
$
146,648

 
$
68,590

 
$
792,420

5. Composition of Certain Financial Statement Captions
The following table summarizes property and equipment, and the related accumulated depreciation and amortization, at March 31, 2017 and September 30, 2016: 
 
March 31,
2017
 
September 30,
2016
 
(In thousands)
Property and equipment
$
127,721

 
$
126,760

Less: accumulated depreciation and amortization
(84,993
)
 
(81,638
)
 
$
42,728

 
$
45,122


8

Table of Contents

6. 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 March 31, 2017, we had $310.0 million in borrowings outstanding at a weighted average interest rate of 2.326%, of which $275.0 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 March 31, 2017.
7. 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 7.2% 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 outstanding 2010 Senior Notes’ weighted average interest rate is 5.4% and the weighted average maturity is 8.7 years. The Senior Notes require interest payments semi-annually and contain certain restrictive covenants, including the maintenance of consolidated net debt to consolidated EBITDA ratio and a fixed charge coverage ratio. The purchase agreements for the Senior Notes also contain certain covenants typical of unsecured facilities. As of March 31, 2017, we were in compliance with all financial covenants.
The following table presents the carrying amounts and fair values for the Senior Notes at March 31, 2017 and September 30, 2016:
 
March 31, 2017
 
September 30, 2016
 
Carrying
Amounts
 
Fair Value
 
Carrying
Amounts (1)
 
Fair Value (1)
 
(In thousands)
The 2008 Senior Notes
$
131,000

 
$
136,675

 
$
131,000

 
$
139,902

The 2010 Senior Notes
185,000

 
191,669

 
185,000

 
195,715

Debt issuance costs
(280
)
 
(280
)
 
(376
)
 
(376
)
       Total
$
315,720

 
$
328,064

 
$
315,624

 
$
335,241

(1) Balances as of September 30, 2016 have been recast as a result of the adoption of ASU 2015-03 to present debt issuance costs of $0.4 million as a direct deduction from the carrying amount of the Senior Notes.
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.
8. Restructuring Expenses
The following table summarizes our restructuring accruals related to certain FICO facility closures. The current portion and non-current portion is recorded in other accrued current liabilities and other long-term liabilities, respectively, within the accompanying condensed consolidated balance sheets. The balance for all the facilities charges will be paid by the end of our fiscal 2020.

9

Table of Contents

 
Accrual at
 
Cash
Payments
 
Accrual at
 
September 30, 2016
 
 
March 31, 2017
 
(In thousands)
Facilities charges
$
9,233

 
$
(1,458
)
 
$
7,775

Less: current portion
(4,266
)
 
 
 
(3,856
)
Non-current
$
4,967

 
 
 
$
3,919

9. Income Taxes
Effective Tax Rate
The effective income tax rate was 24.3% and 28.1% during the quarters ended March 31, 2017 and 2016, respectively and (1.9)% and 24.3% during the six months ended March 31, 2017 and 2016, respectively. The provision for income taxes during interim quarterly reporting periods is based on our estimates of the effective tax rates for the 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 effective tax rate for the six months ended March 31, 2017 was significantly impacted by the recording of excess tax benefits relating to stock awards that vested in December 2016. As a result of the adoption of ASU 2016-09 on October 1, 2016, we no longer record excess tax benefits as an increase to additional paid-in capital, but record such excess tax benefits on a prospective basis as a reduction of income tax expense, which amounted to $20.9 million for the six months ended March 31, 2017. We also anticipate the potential for increased periodic volatility in future effective tax rates as the impact of the continued application of ASU 2016-09 is dependent upon our future grants of stock-based compensation, our future stock price in relation to the fair value of awards on grant date and the exercise behavior of our stock option holders.
The total unrecognized tax benefit for uncertain tax positions is estimated to be approximately $7.5 million and $6.8 million at March 31, 2017 and September 30, 2016, 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 $0.4 million and $0.3 million related to unrecognized tax benefits as of March 31, 2017 and September 30, 2016, respectively.
10. 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 six months ended March 31, 2017 and 2016: 
 
Quarter Ended March 31,
 
Six Months Ended March 31,
 
2017
 
2016
 
2017
 
2016
 
(In thousands, except per share data)
Numerator for diluted and basic earnings per share:
 
 
 
 
 
 
 
Net Income
$
25,084

 
$
23,116

 
$
62,985

 
$
42,357

Denominator - share:
 
 
 
 
 
 
 
Basic weighted-average shares
31,017

 
31,268

 
31,003

 
31,226

Effect of dilutive securities
1,243

 
994

 
1,395

 
1,123

Diluted weighted-average shares
32,260

 
32,262

 
32,398

 
32,349

Earnings per share:
 
 
 
 
 
 
 
Basic
$
0.81

 
$
0.74

 
$
2.03

 
$
1.36

Diluted
$
0.78

 
$
0.72

 
$
1.94

 
$
1.31

We exclude the options to purchase shares of common stock in the computation of the diluted EPS where the exercise price of the options exceeds the average market price of our common stock as their inclusion would be antidilutive. There were approximately 34,000 and 21,000 options excluded for the quarters ended March 31, 2017 and 2016, respectively. There were approximately 17,000 and 18,000 options excluded for the six months ended March 31, 2017 and 2016, respectively.

10

Table of Contents

11. 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.
 
Applications. This segment includes pre-configured decision management applications designed for a specific type of business problem or process — such as marketing, account origination, customer management, fraud, collections and insurance claims management — as well as associated professional services. These applications are available to our customers as on-premises software, and many are available as hosted, software-as-a-service (“SaaS”) applications through the FICO® Analytic Cloud.
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.
Decision Management Software. This segment is composed of analytic and decision management software tools that clients can use to create their own custom decision management applications, our new FICO® Decision Management Suite, as well as associated professional services. These tools are available to our customers as on-premises software or through the FICO® Analytic Cloud.
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, nor capital expenditures where 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 six months ended March 31, 2017 and 2016: 
 
Quarter Ended March 31, 2017
 
Applications
 
Scores
 
Decision Management Software
 
Unallocated
Corporate
Expenses
 
Total
 
(In thousands)
Segment revenues:
 
 
 
 
 
 
 
 
 
Transactional and maintenance
$
86,013

 
$
63,628

 
$
11,608

 
$

 
$
161,249

Professional services
32,640

 
994

 
7,650

 

 
41,284

License
15,684

 
811

 
9,350

 

 
25,845

Total segment revenues
134,337

 
65,433

 
28,608

 

 
228,378

Segment operating expense
(99,454
)
 
(14,484
)
 
(31,152
)
 
(25,223
)
 
(170,313
)
Segment operating income (loss)
$
34,883

 
$
50,949

 
$
(2,544
)
 
$
(25,223
)
 
58,065

Unallocated share-based compensation expense
 
 
 
 
 
 
 
 
(14,712
)
Unallocated amortization expense
 
 
 
 
 
 
 
 
(3,312
)
Operating income
 
 
 
 
 
 
 
 
40,041

Unallocated interest expense, net
 
 
 
 
 
 
 
 
(6,578
)
Unallocated other expense, net
 
 
 
 
 
 
 
 
(327
)
Income before income taxes
 
 
 
 
 
 
 
 
$
33,136

Depreciation expense
$
3,959

 
$
236

 
$
1,202

 
$
341

 
$
5,738


11

Table of Contents

 
Quarter Ended March 31, 2016
 
Applications
 
Scores
 
Decision Management Software
 
Unallocated
Corporate
Expenses
 
Total
 
(In thousands)
Segment revenues:
 
 
 
 
 
 
 
 
 
Transactional and maintenance
$
80,751

 
$
59,265

 
$
10,727

 
$

 
$
150,743

Professional services
31,719

 
1,112

 
6,511

 

 
39,342

License
9,447

 
739

 
6,407

 

 
16,593

Total segment revenues
121,917

 
61,116

 
23,645

 

 
206,678

Segment operating expense
(87,955
)
 
(14,090
)
 
(27,120
)
 
(21,882
)
 
(151,047
)
Segment operating income (loss)
$
33,962

 
$
47,026

 
$
(3,475
)
 
$
(21,882
)
 
55,631

Unallocated share-based compensation expense
 
 
 
 
 
 
 
 
(13,600
)
Unallocated amortization expense
 
 
 
 
 
 
 
 
(3,507
)
Operating income
 
 
 
 
 
 
 
 
38,524

Unallocated interest expense, net
 
 
 
 
 
 
 
 
(6,815
)
Unallocated other expense, net
 
 
 
 
 
 
 
 
435

Income before income taxes
 
 
 
 
 
 
 
 
$
32,144

Depreciation expense
$
2,708

 
$
185

 
$
1,000

 
$
327

 
$
4,220


 
Six Months Ended March 31, 2017
 
Applications
 
Scores
 
Decision Management Software
 
Unallocated
Corporate
Expenses
 
Total
 
(In thousands)
Segment revenues:
 
 
 
 
 
 
 
 
 
Transactional and maintenance
$
170,894

 
$
121,880

 
$
22,135

 
$

 
$
314,909

Professional services
66,981

 
1,515

 
16,331

 

 
84,827

License
31,227

 
1,420

 
15,595

 

 
48,242

Total segment revenues
269,102

 
124,815

 
54,061

 

 
447,978

Segment operating expense
(199,251
)
 
(27,803
)
 
(60,237
)
 
(49,856
)
 
(337,147
)
Segment operating income (loss)
$
69,851

 
$
97,012

 
$
(6,176
)
 
$
(49,856
)
 
110,831

Unallocated share-based compensation expense
 
 
 
 
 
 
 
 
(29,231
)
Unallocated amortization expense
 
 
 
 
 
 
 
 
(6,632
)
Operating income
 
 
 
 
 
 
 
 
74,968

Unallocated interest expense, net
 
 
 
 
 
 
 
 
(12,750
)
Unallocated other expense, net
 
 
 
 
 
 
 
 
(427
)
Income before income taxes
 
 
 
 
 
 
 
 
$
61,791

Depreciation expense
$
7,827

 
$
502

 
$
2,328

 
$
690

 
$
11,347


12

Table of Contents

 
Six Months Ended March 31, 2016
 
Applications
 
Scores
 
Decision Management Software
 
Unallocated
Corporate
Expenses
 
Total
 
(In thousands)
Segment revenues:
 
 
 
 
 
 
 
 
 
Transactional and maintenance
$
161,734

 
$
114,482

 
$
21,599

 
$

 
$
297,815

Professional services
58,845

 
1,860

 
12,789

 

 
73,494

License
21,479

 
776

 
13,190

 

 
35,445

Total segment revenues
242,058

 
117,118

 
47,578

 

 
406,754

Segment operating expense
(175,392
)
 
(28,259
)
 
(52,414
)
 
(45,944
)
 
(302,009
)
Segment operating income (loss)
$
66,666

 
$
88,859

 
$
(4,836
)
 
$
(45,944
)
 
104,745

Unallocated share-based compensation expense
 
 
 
 
 
 
 
 
(28,300
)
Unallocated amortization expense
 
 
 
 
 
 
 
 
(7,087
)
Operating income
 
 
 
 
 
 
 
 
69,358

Unallocated interest expense, net
 
 
 
 
 
 
 
 
(13,539
)
Unallocated other expense, net
 
 
 
 
 
 
 
 
101

Income before income taxes
 
 
 
 
 
 
 
 
$
55,920

Depreciation expense
$
5,452

 
$
362

 
$
1,635

 
$
632

 
$
8,081


12. 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.

13

Table of Contents

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. 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 2017.
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.
We derive a significant portion of our revenues from clients outside the United States. International revenues accounted for 37% and 35% of total consolidated revenues for the quarters ended March 31, 2017 and 2016, respectively, and 36% and 34% of total consolidated revenues for the six months ended March 31, 2017 and 2016, 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% of our revenues were derived from within the same industry during the quarters ended March 31, 2017 and 2016, and 74% of our revenues were derived from within this industry during the six months ended March 31, 2017 and 2016. 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 71% and 73% of our revenues during the quarters ended March 31, 2017 and 2016, respectively. Arrangements with transactional or unit-based pricing accounted for 70% and 73% of our revenues during the six months ended March 31, 2017 and 2016, respectively.

Operating income increased to $40.0 million and $75.0 million during the quarter and six months ended March 31, 2017, respectively, from $38.5 million and $69.4 million during the quarter and six months ended March 31, 2016, respectively. For our Scores segment, we continue to drive growth in both revenue and operating margin with our industry leading business-to-business FICO® Scores expanding further into the larger, faster growing U.S. consumer market. Scores revenue increased to $65.4 million and $124.8 million during the quarter and six months ended March 31, 2017, respectively, from $61.1 million and $117.1 million during the quarter and six months ended March 31, 2016, respectively, a 7% increase quarter over quarter and year-to-date period over period. Scores operating income increased to $50.9 million and $97.0 million during the quarter and six months ended March 31, 2017, respectively, from $47.0 million and $88.9 million during the quarter and six months ended March 31, 2016, respectively, an 8% increase quarter over quarter and 9% increase year-to-date period over period. For our Applications and Decision Management Software segments, we continue to expand our investments in sales distributions and go-to-market, and began to broaden our investment into product delivery, support and infrastructure operations. Applications revenue increased 10% quarter over quarter and 11% year-to-date period over period, and Decision Management Software revenue increased 21% quarter over quarter and 14% year-to-date period over period, while the margins for both segments remained flat.

Net margin increased from 10% to 14% year-to-date period over period, a 35% increase, primarily driven by our adoption of ASU 2016-09 effective October 1, 2016, as further described in Notes 1 and 9 to the accompanying condensed consolidated financial statements.

We continue to enhance shareholder value by returning cash to shareholders through our stock repurchase program. During the quarter and six months ended March 31, 2017, we repurchased approximately 0.3 million shares at a total repurchase price of $44.2 million and 0.6 million shares at a total repurchase price of $74.6 million, respectively. As of March 31, 2017, we had $155.4 million remaining under our current stock repurchase program.
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
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.

14

Table of Contents

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 March 31, 2017
$
91.2

 
23
%
 
13

 
26

Quarter Ended March 31, 2016
$
132.5

 
13
%
 
15

 
55

Six Months Ended March 31, 2017
$
187.6

 
29
%
 
26

 
NM(a)

Six Months Ended March 31, 2016
$
218.9

 
24
%
 
25

 
NM(a)

 
(1)
Bookings yield represents the percentage of revenue recognized from bookings for the periods indicated.
(2)
Weighted-average term of bookings measures the average term over which bookings are expected to be recognized as revenue.
(a)
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 43% and 50% of total bookings for the quarters ended March 31, 2017 and 2016, respectively. Professional services bookings were 37% and 38% of total bookings for the quarters ended March 31, 2017 and 2016, respectively. License bookings were 20% and 12% of total bookings for the quarters ended March 31, 2017 and 2016, respectively.
Transactional and maintenance bookings were 37% and 41% of total bookings for the six months ended March 31, 2017 and 2016, respectively. Professional services bookings were 46% and 44% of total bookings for the six months ended March 31, 2017 and 2016, respectively. License bookings were 17% and 15% of total bookings for the six months ended March 31, 2017 and 2016, respectively.
RESULTS OF OPERATIONS
Revenues
The following tables set forth certain summary information on a segment basis related to our revenues for the quarters and six months ended March 31, 2017 and 2016:
 
Quarter Ended March 31,
 
Percentage of Revenues
 
Period-to-Period Change
 
Period-to-Period
Percentage Change
Segment
2017
 
2016
 
2017
 
2016
 
 
 
(In thousands)
 
 
 
 
 
(In thousands)
 
 
Applications
$
134,337

 
$
121,917

 
59
%
 
59
%
 
$
12,420

 
10
%
Scores
65,433

 
61,116

 
29
%
 
30
%
 
4,317

 
7
%
Decision Management Software
28,608

 
23,645

 
12
%
 
11
%
 
4,963

 
21
%
Total
$
228,378

 
$
206,678

 
100
%
 
100
%
 
21,700

 
10
%
 
 
 
 
 
 
 
 
 
Six Months Ended March 31,
 
Percentage of Revenues
 
Period-to-Period Change
 
Period-to-Period
Percentage Change
Segment
2017
 
2016
 
2017
 
2016
 
 
 
(In thousands)
 
 
 
 
 
(In thousands)
 
 
Applications
$
269,102

 
$
242,058

 
60
%
 
59
%
 
$
27,044

 
11
%
Scores
124,815

 
117,118

 
28
%
 
29
%
 
7,697

 
7
%
Decision Management Software
54,061

 
47,578

 
12
%
 
12
%
 
6,483

 
14
%
Total
$
447,978

 
$
406,754

 
100
%
 
100
%
 
41,224

 
10
%


15

Table of Contents

Quarter Ended March 31, 2017 Compared to Quarter Ended March 31, 2016

Applications
 
Quarter Ended March 31,
 
Period-to-Period Change
 
Period-to-Period
Percentage Change
 
2017
 
2016
 
 
 
(In thousands)
 
(In thousands)
 
 
Transactional and maintenance
$
86,013

 
$
80,751

 
$
5,262

 
7
%
Professional services
32,640

 
31,719

 
921

 
3
%
License
15,684

 
9,447

 
6,237

 
66
%
Total
$
134,337

 
$
121,917

 
12,420

 
10
%
Applications segment revenues increased $12.4 million primarily due to a $6.8 million increase in our fraud solutions, a $2.8 million increase in our originations solutions, and a $2.8 million increase in our customer communications services. The increase in fraud solutions was primarily attributable to an increase in license revenue mainly driven by one large multi-year license transaction. The increase in originations solutions was primarily attributable to an increase in transactional and services revenues from our SaaS product. The increase in customer communication services was primarily attributable to an increase in transactional revenue as a result of our growth in the mobile communication market.

Scores
 
Quarter Ended March 31,
 
Period-to-Period Change
 
Period-to-Period
Percentage Change
 
2017
 
2016
 
 
 
(In thousands)
 
(In thousands)
 
 
Transactional and maintenance
$
63,628

 
$
59,265

 
$
4,363

 
7
 %
Professional services
994

 
1,112

 
(118
)
 
(11
)%
License
811

 
739

 
72

 
10
 %
Total
$
65,433

 
$
61,116

 
4,317

 
7
 %
Scores segment revenues increased $4.3 million due to an increase of $3.4 million in our business-to-consumer services revenue and $0.9 million in our business-to-business scores revenue. The increase in business-to-consumer services was primarily attributable to an increase in royalties derived from scores sold indirectly to consumers through credit reporting agencies.
During the quarters ended March 31, 2017 and 2016, revenues generated from our agreements with Equifax, TransUnion and Experian collectively accounted for approximately 20% of our total revenues, including revenues from these customers recorded in our other segments.

Decision Management Software
 
Quarter Ended March 31,
 
Period-to-Period Change
 
Period-to-Period
Percentage Change
 
2017
 
2016
 
 
 
(In thousands)
 
(In thousands)
 
 
Transactional and maintenance
$
11,608

 
$
10,727

 
$
881

 
8
%
Professional services
7,650

 
6,511

 
1,139

 
17
%
License
9,350

 
6,407

 
2,943

 
46
%
Total
$
28,608

 
$
23,645

 
4,963

 
21
%
Decision Management Software segment revenues increased $5.0 million primarily attributable to an increase in license revenue related to our FICO® Blaze Advisor® and services revenue related to our FICO® Decision Optimizer.

16

Table of Contents

Six Months Ended March 31, 2017 Compared to Six Months Ended March 31, 2016

Applications
 
Six Months Ended March 31,
 
Period-to-Period Change
 
Period-to-Period
Percentage Change
 
2017
 
2016
 
 
 
(In thousands)
 
(In thousands)
 
 
Transactional and maintenance
$
170,894

 
$
161,734

 
$
9,160

 
6
%
Professional services
66,981

 
58,845

 
8,136

 
14
%
License
31,227

 
21,479

 
9,748

 
45
%
Total
$
269,102

 
$
242,058

 
27,044

 
11
%
Applications segment revenues increased $27.0 million primarily due to a $12.9 million increase in our fraud solutions, an $8.7 million increase in our originations solutions, and a $5.8 million increase in our customer communications services. The increase in fraud solutions was primarily attributable to an increase in license revenue mainly driven by a couple of large multi-year license transactions. The increase in originations solutions was primarily attributable to an increase in services and transactional revenues from our SaaS product. The increase in customer communication services was primarily attributable to an increase in transactional revenue as a result of our growth in the mobile communication market.

Scores
 
Six Months Ended March 31,
 
Period-to-Period Change
 
Period-to-Period
Percentage Change
 
2017
 
2016
 
 
 
(In thousands)
 
(In thousands)
 
 
Transactional and maintenance
$
121,880

 
$
114,482

 
$
7,398

 
6
 %
Professional services
1,515

 
1,860

 
(345
)
 
(19
)%
License
1,420

 
776

 
644

 
83
 %
Total
$
124,815

 
$
117,118

 
7,697

 
7
 %
Scores segment revenues increased $7.7 million due to an increase of $4.0 million in our business-to-consumer services revenue and $3.7 million in our business-to-business scores revenue. The increase in business-to-consumer services was primarily attributable to an increase in royalties derived from scores sold indirectly to consumers through credit reporting agencies. The increase in business-to-business scores was primarily attributable to an increase in our transactional scores driven by new originations and prescreen.
During the six months ended March 31, 2017 and 2016, revenues generated from our agreements with Equifax, TransUnion and Experian collectively accounted for approximately 19% and 20%, respectively, of our total revenues, including revenues from these customers recorded in our other segments.
Decision Management Software
 
Six Months Ended March 31,
 
Period-to-Period Change
 
Period-to-Period
Percentage Change
 
2017
 
2016
 
 
 
(In thousands)
 
(In thousands)
 
 
Transactional and maintenance
$
22,135

 
$
21,599

 
$
536

 
2
%
Professional services
16,331

 
12,789

 
3,542

 
28
%
License
15,595

 
13,190

 
2,405

 
18
%
Total
$
54,061

 
$
47,578

 
6,483

 
14
%
Decision Management Software segment revenues increased $6.5 million primarily attributable to an increase in services revenue related to our FICO® Decision Optimizer, and license revenue related to our FICO® Blaze Advisor®.

17

Table of Contents

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 six months ended March 31, 2017 and 2016:
 
Quarter Ended March 31,
 
Percentage of Revenues
 
Period-to-Period Change
 
Period-to-
Period
Percentage Change
 
2017
 
2016
 
2017
 
2016
 
 
 
(In thousands, except
employees)
 
 
 
 
 
(In thousands,
except employees)
 
 
Revenues
$
228,378

 
$
206,678

 
100
 %
 
100
 %
 
$
21,700

 
10
 %
Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
Cost of revenues
72,131

 
62,298

 
31
 %
 
30
 %
 
9,833

 
16
 %
Research and development
26,663

 
24,848

 
12
 %
 
12
 %
 
1,815

 
7
 %
Selling, general and administrative
86,231

 
77,501

 
38
 %
 
38
 %
 
8,730

 
11
 %
Amortization of intangible assets
3,312

 
3,507

 
1
 %
 
2
 %
 
(195
)
 
(6
)%
Total operating expenses
188,337

 
168,154

 
82
 %
 
82
 %
 
20,183

 
12
 %
Operating income
40,041

 
38,524

 
18
 %
 
18
 %
 
1,517

 
4
 %
Interest expense, net
(6,578
)
 
(6,815
)
 
(3
)%
 
(3
)%
 
237

 
(3
)%
Other expense, net
(327
)
 
435

 
 %
 
 %
 
(762
)
 
(175
)%
Income before income taxes
33,136

 
32,144

 
15
 %
 
15
 %
 
992

 
3
 %
Provision for income taxes
8,052

 
9,028

 
4
 %
 
4
 %
 
(976
)
 
(11
)%
Net income
$
25,084

 
$
23,116

 
11
 %
 
11
 %
 
1,968

 
9
 %
Number of employees at quarter end
3,306

 
2,852

 
 
 
 
 
454

 
16
 %
 
Six Months Ended March 31,
 
Percentage of Revenues
 
Period-to-Period Change
 
Period-to-
Period
Percentage Change
 
2017
 
2016
 
2017
 
2016
 
 
 
(In thousands)
 
 
 
 
 
(In thousands)
 
 
Revenues
$
447,978

 
$
406,754

 
100
 %
 
100
 %
 
$
41,224

 
10
 %
Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
Cost of revenues
142,128

 
124,491

 
32
 %
 
31
 %
 
17,637

 
14
 %
Research and development
52,805

 
49,479

 
12
 %
 
12
 %
 
3,326

 
7
 %
Selling, general and administrative
171,445

 
156,339

 
38
 %
 
39
 %
 
15,106

 
10
 %
Amortization of intangible assets
6,632

 
7,087

 
1
 %
 
2
 %
 
(455
)
 
(6
)%
Total operating expenses
373,010

 
337,396

 
83
 %
 
84
 %
 
35,614

 
11
 %
Operating income
74,968

 
69,358

 
17
 %
 
16
 %
 
5,610

 
8
 %
Interest expense, net
(12,750
)
 
(13,539
)
 
(3
)%
 
(3
)%
 
789

 
(6
)%
Other expense, net
(427
)
 
101

 
 %
 
 %
 
(528
)
 
(523
)%
Income before income taxes
61,791

 
55,920

 
14
 %
 
13
 %
 
5,871

 
10
 %
Provision for income taxes
(1,194
)
 
13,563

 
 %
 
3
 %
 
(14,757
)
 
(109
)%
Net income
$
62,985

 
$
42,357

 
14
 %
 
10
 %
 
20,628

 
49
 %

18

Table of Contents

Cost of Revenues
Cost of revenues consists primarily of employee salaries and benefits for personnel directly involved in developing, installing and supporting revenue products; travel costs; overhead costs; outside services; internal network hosting costs; software royalty fees; and credit bureau data and processing services.
Cost of revenues as a percentage of revenues increased to 31% during the quarter ended March 31, 2017 from 30% during the quarter ended March 31, 2016. The $9.8 million increase was primarily attributable to a $6.7 million increase in personnel and labor costs, and a $2.0 million increase in allocated facilities and infrastructure costs. The increase in personnel and labor costs was primarily attributable to an increase in professional services delivery cost, an increase in salaries and benefit costs as a result of our increased headcount, as well as an increase in incentive cost. The increase in allocated facilities and infrastructure costs was primarily attributable to increased resource requirement due to our expanded investment in product delivery, support and infrastructure operations.
Cost of revenues as a percentage of revenues increased to 32% during the six months ended March 31, 2017 from 31% during the six months ended March 31, 2016. The year-to-date period over period increase of $17.6 million was primarily attributable to an $11.3 million increase in personnel and labor costs, and a $4.8 million increase in allocated facilities and infrastructure costs. The increase in personnel and labor costs was primarily attributable to an increase in professional services delivery cost driven by higher services revenue, an increase in salaries and benefit costs as a result of our increased headcount, as well as an increase in incentive cost. The increase in allocated facilities and infrastructure costs was primarily attributable to increased resource requirement due to our expanded investment in product delivery, support and infrastructure operations.
Over the next several quarters, we expect cost of revenues as a percentage of revenues will be consistent with those incurred during the quarter ended March 31, 2017.
Research and Development
Research and development expenses include personnel and related overhead costs incurred in the development of new products and services, including research of mathematical and statistical models and development of new versions of Applications and Decision Management Software products.
Research and development expenses increased $1.9 million to $26.7 million during the quarter ended March 31, 2017 from $24.8 million during the quarter ended March 31, 2016. The increase was primarily attributable to an increase in personnel and labor cost driven by our increased headcount. Research and development expenses as a percentage of revenues was 12% during the quarter ended March 31, 2017, consistent with those incurred during the quarter ended March 31, 2016.
Research and development expenses increased $3.3 million to $52.8 million during the six months ended March 31, 2017 from $49.5 million during the six months ended March 31, 2016. The increase was primarily attributable to an increase in personnel and labor cost driven by our increased headcount. Research and development expenses as a percentage of revenues was 12% during the six months ended March 31, 2017, consistent with those incurred during the six months ended March 31, 2016.
Over the next several quarters, we expect research and development expenditures as a percentage of revenues will be consistent with those incurred during the quarter ended March 31, 2017.
Selling, General and Administrative
Selling, general and administrative expenses consist principally of employee salaries, commissions and benefits; travel costs; overhead costs; advertising and other promotional expenses; corporate facilities expenses; legal expenses; business development expenses and the cost of operating computer systems.
Selling, general and administrative expenses increased $8.7 million to $86.2 million during the quarter ended March 31, 2017 from $77.5 million during the quarter ended March 31, 2016, primarily driven by our continued investment in sales distribution and go-to-market. Selling, general and administrative expenses as a percentage of revenues was 38% during the quarter ended March 31, 2017, consistent with those incurred during the quarter ended March 31, 2016.
Selling, general and administrative expenses increased $15.1 million to $171.4 million during the six months ended March 31, 2017 from $156.3 million during the six months ended March 31, 2016, primarily driven by our continued investment in sales distribution and go-to-market. Selling, general and administrative expenses as a percentage of revenues was 38% during the six months ended March 31, 2017, materially consistent with those incurred during the six months ended March 31, 2016.

19

Table of Contents

Over the next several quarters, we expect selling, general and administrative expenses as a percentage of revenues will be consistent with those incurred during the quarter ended March 31, 2017.
Amortization of Intangible Assets
Amortization of intangible assets consists of amortization expense related to intangible assets recorded in connection with acquisitions accounted for by the acquisition method of accounting. Our finite-lived intangible assets, consisting primarily of completed technology and customer contracts and relationships, are being amortized using the straight-line method over periods ranging from four to fifteen years.
Amortization expense was $3.3 million and $6.6 million for the quarter and six months ended March 31, 2017, respectively. Over the next several quarters we expect that amortization expense will be consistent with or lower than the amortization expense we recorded during the quarter ended March 31, 2017 due to certain intangible assets associated with our Adeptra acquisition becoming fully amortized in September 2017.
Interest Expense, Net
Interest expense includes primarily interest on the senior notes is