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 December 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 January 12, 2018 was 30,073,085 (excluding 58,783,698 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)
 
December 31,
2017
 
September 30,
2017
 
(In thousands, except par value data)
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
94,213

 
$
105,618

Accounts receivable, net
164,660

 
168,586

Prepaid expenses and other current assets
40,263

 
36,727

Total current assets
299,136

 
310,931

Marketable securities
15,816

 
13,791

Other investments
11,734

 
11,724

Property and equipment, net
38,808

 
40,703

Goodwill
806,332

 
804,414

Intangible assets, net
19,514

 
21,185

Deferred income taxes
40,699

 
47,204

Other assets
8,806

 
5,668

Total assets
$
1,240,845

 
$
1,255,620

Liabilities and Stockholders’ Equity
 
 
 
Current liabilities:
 
 
 
Accounts payable
$
19,201

 
$
19,510

Accrued compensation and employee benefits
49,031

 
77,610

Other accrued liabilities
25,305

 
32,104

Deferred revenue
58,743

 
55,431

Current maturities on debt
201,000

 
142,000

Total current liabilities
353,280

 
326,655

Long-term debt
462,834

 
462,801

Other liabilities
39,089

 
39,627

Total liabilities
855,203

 
829,083

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 30,246 and 30,243 shares outstanding at December 31, 2017 and September 30, 2017, respectively)
302

 
302

Paid-in-capital
1,160,274

 
1,195,431

Treasury stock, at cost (58,611 and 58,614 shares at December 31, 2017 and September 30, 2017, respectively)
(2,337,205
)
 
(2,301,097
)
Retained earnings
1,625,694

 
1,598,395

Accumulated other comprehensive loss
(63,423
)
 
(66,494
)
Total stockholders’ equity
385,642

 
426,537

Total liabilities and stockholders’ equity
$
1,240,845

 
$
1,255,620


See accompanying notes.

1

Table of Contents

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

 
Quarter Ended December 31,
 
2017
 
2016
 
(In thousands, except per share data)
Revenues:
 
 
 
Transactional and maintenance
$
174,662

 
$
153,660

Professional services
42,626

 
43,543

License
18,033

 
22,397

Total revenues
235,321

 
219,600

Operating expenses:
 
 
 
Cost of revenues *
74,359

 
69,997

Research and development
28,974

 
26,142

Selling, general and administrative *
90,296

 
85,214

Amortization of intangible assets *
1,788

 
3,320

Total operating expenses
195,417

 
184,673

Operating income
39,904

 
34,927

Interest expense, net
(6,460
)
 
(6,172
)
Other income (expense), net
513

 
(100
)
Income before income taxes
33,957

 
28,655

Provision for income taxes
6,658

 
(9,246
)
Net income
27,299

 
37,901

Other comprehensive income (loss):
 
 
 
Foreign currency translation adjustments
3,071

 
(14,347
)
Comprehensive income
$
30,370

 
$
23,554

Earnings per share:
 
 
 
Basic
$
0.91

 
$
1.22

Diluted
$
0.86

 
$
1.16

Shares used in computing earnings per share:
 
 
 
Basic
30,078

 
30,989

Diluted
31,561

 
32,536

 
 
* 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, 2017
30,243

 
$
302

 
$
1,195,431

 
$
(2,301,097
)
 
$
1,598,395

 
$
(66,494
)
 
$
426,537

Share-based compensation

 

 
16,510

 

 

 

 
16,510

Issuance of treasury stock under employee stock plans
338

 
3

 
(51,667
)
 
13,490

 

 

 
(38,174
)
Repurchases of common stock
(335
)
 
(3
)
 

 
(49,598
)
 

 

 
(49,601
)
Net income

 

 

 

 
27,299

 

 
27,299

Foreign currency translation adjustments

 

 

 

 

 
3,071

 
3,071

Balance at December 31, 2017
30,246

 
$
302

 
$
1,160,274

 
$
(2,337,205
)
 
$
1,625,694

 
$
(63,423
)
 
$
385,642

See accompanying notes.


3

Table of Contents

FAIR ISAAC CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 
Quarter Ended December 31,
 
2017
 
2016
 
(In thousands)
Cash flows from operating activities:
 
 
 
Net income
$
27,299

 
$
37,901

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
7,731

 
9,058

Share-based compensation
16,510

 
14,519

Deferred income taxes
6,717

 

Net gain on marketable securities

(90
)
 

Provision for doubtful accounts, net

 
463

Net loss on sales of property and equipment
9

 

Changes in operating assets and liabilities:
 
 
 
Accounts receivable
4,656

 
8,253

Prepaid expenses and other assets
(6,527
)
 
(16,876
)
Accounts payable
(119
)
 
(725
)
Accrued compensation and employee benefits
(28,672
)
 
(29,030
)
Other liabilities
(1,174
)
 
(2,091
)
Deferred revenue
2,437

 
11,506

Net cash provided by operating activities
28,777

 
32,978

Cash flows from investing activities:
 
 
 
Purchases of property and equipment
(4,044
)
 
(4,319
)
Proceeds from sales of marketable securities
8

 

Purchases of marketable securities
(1,943
)
 

Net cash used in investing activities
(5,979
)
 
(4,319
)
Cash flows from financing activities:
 
 
 
Proceeds from revolving line of credit
79,000

 
60,000

Payments on revolving line of credit
(20,000
)
 
(10,000
)
Payments on debt issuance costs

(240
)
 

Proceeds from issuance of treasury stock under employee stock plans
693

 
3,663

Taxes paid related to net share settlement of equity awards
(38,867
)
 
(35,598
)
Dividends paid

 
(618
)
Repurchases of common stock
(55,263
)
 
(30,442
)
Net cash used in financing activities
(34,677
)
 
(12,995
)
Effect of exchange rate changes on cash
474

 
(3,489
)
Increase (decrease) in cash and cash equivalents
(11,405
)
 
12,175

Cash and cash equivalents, beginning of period
105,618

 
75,926

Cash and cash equivalents, end of period
$
94,213

 
$
88,101

Supplemental disclosures of cash flow information:
 
 
 
Cash paid for income taxes, net of refunds
$
2,221

 
$
7,463

Cash paid for interest
$
7,087

 
$
5,851

Supplemental disclosures of non-cash investing and financing activities:
 
 
 
Purchase of property and equipment included in accounts payable
$
1,482

 
$
3,816

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, 2017. 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.

5

Table of Contents

New Accounting Pronouncements
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.
We have established a cross-functional implementation team consisting of representatives across the organization to address the scope of work required to implement the recognition and disclosure requirements under the new standard. This cross-functional implementation team has developed a project plan, which includes evaluating customer contracts across the organization, developing policies, processes and tools to report financial results, and implementing and evaluating our internal controls over financial reporting that will be necessary under the new standard. We currently plan to adopt Topic 606 in the first quarter of our fiscal 2019 using the retrospective transition method. Our ability to adopt Topic 606 using the full retrospective method is dependent on system readiness, and the completion of our analysis of information necessary to restate prior period financial statements. As we continue to assess the new standard along with industry trends and additional interpretive guidance, we may adjust our implementation plan accordingly.
We are continuing to assess the impact of adopting Topic 606 on our consolidated financial statements and believe the new standard will impact the following policies and disclosures:
Timing of revenue recognition of license revenue on term licenses and transactional revenue on guaranteed minimum fees related to our on-premises software products. Under the new standard, we expect to recognize revenue when control of the license is transferred to the customer, rather than at the date payments become due and payable or ratably over the term of the contract required under the current standard;
Presentation of contract balances. Under the new standard, when we enter into noncancellable contracts that provide unconditional rights to payment from our customers for services that we have not yet completed providing or services we will provide in the near future, we expect to present the unconditional rights as receivables, regardless of whether cash has been received from customers;
Required disclosures including information about remaining transaction price and when we expect to recognize revenue; and
Accounting for commissions under the new standard will result in the deferral of incremental commission costs for obtaining contracts.
We do not currently expect Topic 606 to have a significant effect on the timing of revenue recognition for our maintenance or professional services revenues, or SaaS contracts.

6

Table of Contents

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 as of the beginning of an annual reporting period for which financial statements (interim or annual) have not been issued. We do not believe that adoption of ASU 2016-16 will have a significant impact 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 December 31, 2017 and September 30, 2017.
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 December 31, 2017 and September 30, 2017.
The following tables represent financial assets that we measured at fair value on a recurring basis at December 31, 2017 and September 30, 2017:

7

Table of Contents

December 31, 2017
Active Markets for
Identical Instruments
(Level 1)
 
Fair Value as of December 31, 2017
 
(In thousands)
Assets:
 
 
 
Cash equivalents (1)
$
4,105

 
$
4,105

Marketable securities (2)
15,816

 
15,816

Total
$
19,921

 
$
19,921

 
 
 
 
September 30, 2017
Active Markets for
Identical Instruments
(Level 1)
 
Fair Value as of September 30, 2017
 
(In thousands)
Assets:
 
 
 
Cash equivalents (1)
$
15,295

 
$
15,295

Marketable securities (2)
13,791

 
13,791

Total
$
29,086

 
$
29,086

(1)
Included in cash and cash equivalents on our condensed consolidated balance sheet at December 31, 2017 and September 30, 2017. Not included in these tables are cash deposits of $90.1 million and $90.3 million at December 31, 2017 and September 30, 2017, 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 on our condensed consolidated balance sheet at December 31, 2017 and September 30, 2017.
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.

8

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 December 31, 2017 and September 30, 2017:
 
December 31, 2017
 
Contract Amount
 
Fair Value
 
Foreign
Currency
 
US$
 
US$
 
(In thousands)
Sell foreign currency:
 
 
 
 
 
 
Euro (EUR)
EUR 
7,350

 
$
8,825

 
$

Buy foreign currency:
 
 
 
 
 
 
British pound (GBP)
GBP 
5,398

 
$
7,300

 
$

Singapore dollar (SGD)

SGD
7,734

 
$
5,800

 
$

 
September 30, 2017
 
Contract Amount
 
Fair Value
 
Foreign
Currency
 
US$
 
US$
 
(In thousands)
Sell foreign currency:
 
 
 
 
 
 
Euro (EUR)
EUR 
5,050

 
$
5,968

 
$

Buy foreign currency:
 
 
 
 
 
 
British pound (GBP)
GBP 
9,341

 
$
12,500

 
$

The foreign currency forward contracts were entered into on December 31, 2017 and September 30, 2017, 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 December 31,
 
2017
 
2016
 
(In thousands)
Gains (losses) on foreign currency forward contracts
$
194

 
$
(560
)

9

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 December 31,
 
2017
 
2016
 
(In thousands)
Cost of revenues
$
706

 
$
1,686

Selling, general and administrative expenses
1,082

 
1,634

 
$
1,788

 
$
3,320


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 $112.1 million and $114.5 million as of December 31, 2017 and September 30, 2017, respectively.

Estimated future intangible asset amortization expense associated with intangible assets existing at December 31, 2017 was as follows (in thousands):
Year Ended September 30,
 
2018 (excluding the quarter ended December 31, 2017)
$
4,803

2019
6,085

2020
3,689

2021
2,433

2022
2,287

Thereafter
217


$
19,514

The following table summarizes changes to goodwill during the quarter ended December 31, 2017, both in total and as allocated to our segments:
 
Applications
 
Scores
 
Decision Management Software
 
Total
 
(In thousands)
Balance at September 30, 2017
$
588,288

 
$
146,648

 
$
69,478

 
$
804,414

Foreign currency translation adjustment
1,777

 

 
141

 
1,918

Balance at December 31, 2017
$
590,065

 
$
146,648

 
$
69,619

 
$
806,332

5. Composition of Certain Financial Statement Captions
The following table summarizes property and equipment, and the related accumulated depreciation and amortization, at December 31, 2017 and September 30, 2017:
 
December 31,
2017
 
September 30,
2017
 
(In thousands)
Property and equipment
$
139,344

 
$
135,360

Less: accumulated depreciation and amortization
(100,536
)
 
(94,657
)
 
$
38,808

 
$
40,703


10

Table of Contents

6. Revolving Line of Credit
On November 17, 2017, we amended our credit agreement with a syndicate of banks, increasing our borrowing capacity under the unsecured revolving line of credit to $600 million. The revolving line of credit 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 December 31, 2017, we had $420.0 million in borrowings outstanding at a weighted average interest rate of 2.655%, of which $350.0 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 December 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 5.6% and the weighted average maturity is 9.8 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 December 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 December 31, 2017 and September 30, 2017:
 
December 31, 2017
 
September 30, 2017
 
Carrying
Amounts
 
Fair Value
 
Carrying
Amounts
 
Fair Value
 
(In thousands)
The 2008 Senior Notes
$
131,000

 
$
132,814

 
$
131,000

 
$
134,250

The 2010 Senior Notes
113,000

 
117,669

 
113,000

 
119,106

Debt issuance costs
(166
)
 
(166
)
 
(199
)
 
(199
)
       Total
$
243,834

 
$
250,317

 
$
243,801

 
$
253,157

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 facility closures and employee separation charges. 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 fiscal 2020. The balance for all the employee separation costs will be paid by the end of the second quarter of fiscal 2018.

11

Table of Contents

 
Accrual at
 
Cash
Payments
 
Accrual at
 
September 30, 2017
 
 
December 31, 2017
 
(In thousands)
Facilities charges
$
8,120

 
$
(702
)
 
$
7,418

Employee separation
185

 
(126
)
 
59

 
8,305

 
$
(828
)
 
7,477

Less: current portion
(3,077
)
 
 
 
(3,524
)
Non-current
$
5,228

 
 
 
$
3,953

9. Income Taxes
Effective Tax Rate
The effective income tax rate was 19.6% and (32.3)% during the quarters ended December 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 three months ended December 31, 2017 was significantly impacted by recording the impact of the Tax Cuts and Jobs Act (the “Tax Act”), enacted on December 22, 2017 by the U.S. government. The Tax Act makes broad and complex changes to the U.S. tax code that will affect our fiscal year ended September 30, 2018, including, but not limited to, (1) reducing the U.S. federal corporate tax rate and (2) requiring a one-time transition tax on certain un-repatriated earnings of foreign subsidiaries that is payable over eight years.
The Tax Act reduces the federal corporate tax rate to 21.0% effective January 1, 2018. In accordance with Section 15 of the Internal Revenue Code, we will utilize a blended rate of 24.5% for our fiscal 2018 tax year, by applying a prorated percentage of the number of days prior to and subsequent to the January 1, 2018 effective date. We recorded provisional charges for the re-measurement of the deferred tax assets of $5.6 million to our income tax expense related to long-term deferred tax assets and $1.3 million related to short-term deferred tax assets during the quarter ended December 31, 2017.
The Deemed Repatriation Transition Tax (the “Transition Tax”) is a tax on previously untaxed accumulated earnings and profits (“E&P”) of certain of our foreign subsidiaries. To determine the amount of the Transition Tax, we must determine, in addition to other factors, the amount of post-1986 E&P of the relevant subsidiaries, as well as the amount of non-U.S. income taxes paid on such earnings. We are able to make a reasonable estimate and recorded a provisional Transition Tax obligation of $4.9 million.
On December 22, 2017, the SEC issued Staff Accounting Bulletin (“SAB 118”), which provides guidance on accounting for tax effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under ASC 740. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Act for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects of the Tax Act is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate to be included in the financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply ASC 740 on the basis of the provision of the tax laws that were in effect immediately before the enactment of the Tax Act. While we are able to make reasonable estimates of the impact of the reduction in corporate rate and the deemed repatriation transition tax, the final impact of the Tax Act may differ from these estimates, due to, among other things, changes in our interpretations and assumptions, additional guidance that may be issued by the I.R.S., and actions we may take. We are continuing to gather additional information to determine the final impact.
The total unrecognized tax benefit for uncertain tax positions is estimated to be approximately $6.1 million and $6.5 million at December 31, 2017 and September 30, 2017, 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 related to unrecognized tax benefits as of December 31, 2017 and September 30, 2017.

12

Table of Contents

10. Share-Based Payments
We maintain the 2012 Long-Term Incentive Plan (the “2012 Plan”) under which we grant equity awards, including stock options, stock appreciation rights, restricted stock awards, stock unit awards and other stock-based awards. All employees, consultants and advisors of FICO or any subsidiary, as well as all non-employee directors are eligible to receive awards under the 2012 Plan. We also have awards currently outstanding under the 1992 Long-term Incentive Plan, which was adopted in February 1992 and expired in February 2012. Stock option awards have a maximum term of seven years. In general, stock option awards and restricted stock unit awards not subject to market or performance conditions vest annually over four years. Restricted stock unit awards subject to market or performance conditions vest annually over three years based on the achievement of specified criteria.
Stock Options
The following table summarizes option activity during the quarter ended December 31, 2017:
 
 
Shares
 
Weighted-average Exercise Price
 
Weighted-average Remaining Contractual Term
 
Aggregate Intrinsic Value
 
 
(In thousands)
 
 
 
(In years)
 
(In thousands)
Outstanding at October 1, 2017
 
1,230

 
$
56.54

 
 
 
 
       Granted
 
3

 
157.31

 
 
 
 
       Exercised
 
(21
)
 
33.10

 
 
 
 
Outstanding at December 31, 2017
 
1,212

 
$
57.19

 
2.90
 
$
116,380

Exercisable at December 31, 2017
 
1,051

 
$
53.34

 
2.68
 
$
105,003

Vested and expected to vest at December 31, 2017
 
1,207

 
$
57.06

 
2.89
 
$
116,081

Restricted Stock Units
The following table summarizes restricted stock unit activity during the quarter ended December 31, 2017:
 
 
Shares
 
Weighted- average Grant-date Fair Value
 
 
(In thousands)
 
 
Outstanding at October 1, 2017
 
1,144

 
$
97.95

       Granted
 
358

 
157.11

       Released
 
(351
)
 
86.88

       Forfeited
 
(5
)
 
109.08

Outstanding at December 31, 2017
 
1,146

 
$
119.76

Performance Share Units
The following table summarizes performance share unit activity during the quarter ended December 31, 2017:
 
 
Shares
 
Weighted- average Grant-date Fair Value
 
 
(In thousands)
 
 
Outstanding at October 1, 2017
 
204

 
$
105.37

       Granted
 
51

 
157.03

       Released
 
(95
)
 
98.15

Outstanding at December 31, 2017
 
160

 
$
126.27


13

Table of Contents

Market Share Units
The following table summarizes market share unit activity during the quarter ended December 31, 2017:
 
 
Shares
 
Weighted- average Grant-date Fair Value
 
 
(In thousands)
 
 
Outstanding at October 1, 2017
 
131

 
$
123.82

       Granted
 
102

 
151.78

       Released
 
(119
)
 
113.70

Outstanding at December 31, 2017
 
114

 
$
159.34


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 ended December 31, 2017 and 2016: 
 
Quarter Ended December 31,
 
2017
 
2016
 
(In thousands, except per share data)
Numerator for diluted and basic earnings per share:
 
 
 
Net Income
$
27,299

 
$
37,901

Denominator - share:
 
 
 
Basic weighted-average shares
30,078

 
30,989

Effect of dilutive securities
1,483

 
1,547

Diluted weighted-average shares
31,561

 
32,536

Earnings per share:
 
 
 
Basic
$
0.91

 
$
1.22

Diluted
$
0.86

 
$
1.16

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 3,000 options excluded for the quarter ended December 31, 2017. There were no options excluded for the quarter ended December 31, 2016.
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.
 
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.

14

Table of Contents

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 ended December 31, 2017 and 2016:
 
Quarter Ended December 31, 2017
 
Applications
 
Scores
 
Decision Management Software
 
Unallocated
Corporate
Expenses
 
Total
 
(In thousands)
Segment revenues:
 
 
 
 
 
 
 
 
 
Transactional and maintenance
$
93,213

 
$
69,574

 
$
11,875

 
$

 
$
174,662

Professional services
34,853

 
278

 
7,495

 

 
42,626

License
13,343

 
63

 
4,627

 

 
18,033

Total segment revenues
141,409

 
69,915

 
23,997

 

 
235,321

Segment operating expense
(102,619
)
 
(15,887
)
 
(31,853
)
 
(26,760
)
 
(177,119
)
Segment operating income (loss)
$
38,790

 
$
54,028

 
$
(7,856
)
 
$
(26,760
)
 
58,202

Unallocated share-based compensation expense
 
 
 
 
 
 
 
 
(16,510
)
Unallocated amortization expense
 
 
 
 
 
 
 
 
(1,788
)
Operating income
 
 
 
 
 
 
 
 
39,904

Unallocated interest expense, net
 
 
 
 
 
 
 
 
(6,460
)
Unallocated other income, net
 
 
 
 
 
 
 
 
513

Income before income taxes
 
 
 
 
 
 
 
 
$
33,957

Depreciation expense
$
3,943

 
$
155

 
$
1,412

 
$
284

 
$
5,794


15

Table of Contents

 
Quarter Ended December 31, 2016
 
Applications
 
Scores
 
Decision Management Software
 
Unallocated
Corporate
Expenses
 
Total
 
(In thousands)
Segment revenues:
 
 
 
 
 
 
 
 
 
Transactional and maintenance
$
84,881

 
$
58,252

 
$
10,527

 
$

 
$
153,660

Professional services
34,341

 
521

 
8,681

 

 
43,543

License
15,543

 
609

 
6,245

 

 
22,397

Total segment revenues
134,765

 
59,382

 
25,453

 

 
219,600

Segment operating expense
(99,797
)
 
(13,319
)
 
(29,085
)
 
(24,633
)
 
(166,834
)
Segment operating income (loss)
$
34,968

 
$
46,063

 
$
(3,632
)
 
$
(24,633
)
 
52,766

Unallocated share-based compensation expense
 
 
 
 
 
 
 
 
(14,519
)
Unallocated amortization expense
 
 
 
 
 
 
 
 
(3,320
)
Operating income
 
 
 
 
 
 
 
 
34,927

Unallocated interest expense, net
 
 
 
 
 
 
 
 
(6,172
)
Unallocated other expense, net
 
 
 
 
 
 
 
 
(100
)
Income before income taxes
 
 
 
 
 
 
 
 
$
28,655

Depreciation expense
$
3,868

 
$
266

 
$
1,126

 
$
349

 
$
5,609

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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.

16

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, expenses, 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 Form 8-K to be filed by us in fiscal 2018.
OVERVIEW
We use analytics to help businesses automate, improve and connect decisions across their 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 leverage the use of big data and mathematical algorithms to predict consumer behavior and 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 onboarding, 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 34% of total consolidated revenues for each of the quarters ended December 31, 2017 and 2016. A significant portion of our revenues are derived from the sale of products and services within the banking (including consumer credit) industry, and 79% and 74% of our revenues were derived from within this industry during the quarters ended December 31, 2017 and 2016, respectively. In addition, we derive a significant share of revenues from transactional or unit-based software license fees, transactional fees derived under credit scoring, data processing, data management and SaaS subscription services arrangements, and annual software maintenance fees. Arrangements with transactional or unit-based pricing accounted for 74% and 70% of our revenues during the quarters ended December 31, 2017 and 2016, respectively.


17

Table of Contents

We continue to drive growth in our Scores segment. Scores revenue increased 18% to $69.9 million during the quarter ended December 31, 2017 from $59.4 million during the quarter ended December 31, 2016. Scores operating income increased 17% to $54.0 million during the quarter ended December 31, 2017 from $46.1 million during the quarter ended December 31, 2016. For our Applications and Decision Management Software segments, our cloud business continues to grow both in the absolute dollar value and as a percentage of revenues as we pursue our cloud-first strategy. During the quarter ended December 31, 2017, cloud revenues accounted for $56.6 million, or 24% of revenues, compared to $50.1 million, or 23% of revenues during the quarter ended December 31, 2016.

Operating income for the quarter ended December 31, 2017 was $39.9 million, an increase of 14% from $34.9 million for the quarter ended December 31, 2016. Net earnings decreased 28% to $27.3 million from $37.9 million primarily due to the income tax expense related to enactment of the Tax Cuts and Jobs Act, partially offset by the increase in operating income.
We continue to enhance stockholder value by returning cash to stockholders through our stock repurchase program. During the quarter ended December 31, 2017, we repurchased approximately 0.3 million shares at a total repurchase price of $49.6 million. As of December 31, 2017, we had $237.0 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.

18

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 December 31, 2017
$
82.2

 
18
%
 
9

 
27

Quarter Ended December 31, 2016
$
96.4

 
21
%
 
13

 
27

 
(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.
Transactional and maintenance bookings were 32% and 30% of total bookings for the quarters ended December 31, 2017 and 2016, respectively. Professional services bookings were 55% of total bookings for each of the quarters ended December 31, 2017 and 2016. License bookings were 13% and 15% of total bookings for the quarters ended December 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 ended December 31, 2017 and 2016:
 
Quarter Ended December 31,
 
Percentage of Revenues
 
Period-to-Period Change
 
Period-to-Period
Percentage Change
Segment
2017
 
2016
 
2017
 
2016
 
 
 
(In thousands)
 
 
 
 
 
(In thousands)
 
 
Applications
$
141,409

 
$
134,765

 
60
%
 
61
%
 
$
6,644

 
5
 %
Scores
69,915

 
59,382

 
30
%
 
27
%
 
10,533

 
18
 %
Decision Management Software
23,997

 
25,453

 
10
%
 
12
%
 
(1,456
)
 
(6
)%
Total
$
235,321

 
$
219,600

 
100
%
 
100
%
 
15,721

 
7
 %

Applications
 
Quarter Ended December 31,
 
Period-to-Period Change
 
Period-to-Period
Percentage Change
 
2017
 
2016
 
 
 
(In thousands)
 
(In thousands)
 
 
Transactional and maintenance
$
93,213

 
$
84,881

 
$
8,332

 
10
 %
Professional services
34,853

 
34,341

 
512

 
1
 %
License
13,343

 
15,543

 
(2,200
)
 
(14
)%
Total
$
141,409

 
$
134,765

 
6,644

 
5
 %
Applications segment revenues increased $6.6 million primarily due to a $4.0 million increase in our customer communications services, a $2.6 million increase in our collections & recovery solutions and a $2.2 million increase in our originations solutions, partially offset by a $2.3 million decrease in our fraud solutions. The increase in customer communication services was primarily attributable to an increase in transactional revenue as a result of our continued growth in the mobile communication market. The increase in collections & recovery solutions was primarily attributable to an increase in software revenue. The increase in originations solutions was primarily attributable to an increase in transactional revenue from our SaaS products. The decrease in fraud solutions was primarily attributable to a decrease in software revenue.


19

Table of Contents

Scores
 
Quarter Ended December 31,
 
Period-to-Period Change
 
Period-to-Period
Percentage Change
 
2017
 
2016
 
 
 
(In thousands)
 
(In thousands)
 
 
Transactional and maintenance
$
69,574

 
$
58,252

 
$
11,322

 
19
 %
Professional services
278

 
521

 
(243
)
 
(47
)%
License
63

 
609

 
(546
)
 
(90
)%
Total
$
69,915

 
$
59,382

 
10,533

 
18
 %
Scores segment revenues increased $10.5 million due to an increase of $5.5 million in our business-to-consumer services revenue and $5.0 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, account management and prescreen.
During the quarters ended December 31, 2017 and 2016, revenues generated from our agreements with Equifax, TransUnion and Experian collectively accounted for 21% and 18%, respectively, of our total revenues, including revenues from these customers recorded in our other segments.

Decision Management Software
 
Quarter Ended December 31,
 
Period-to-Period Change
 
Period-to-Period
Percentage Change
 
2017
 
2016
 
 
 
(In thousands)
 
(In thousands)
 
 
Transactional and maintenance
$
11,875

 
$
10,527

 
$
1,348

 
13
 %
Professional services
7,495

 
8,681

 
(1,186
)
 
(14
)%
License
4,627

 
6,245

 
(1,618
)
 
(26
)%
Total
$
23,997

 
$
25,453

 
(1,456
)
 
(6
)%
Decision Management Software segment revenues decreased $1.5 million primarily attributable to a decrease in license revenue related to our FICO® Blaze Advisor® product.

20

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 ended December 31, 2017 and 2016:
 
Quarter Ended December 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
$
235,321

 
$
219,600

 
100
 %
 
100
 %
 
$
15,721

 
7
 %
Operating expenses:
 
 
 
 
 
 
 
 
 
 
 
Cost of revenues
74,359

 
69,997

 
32
 %
 
32
 %
 
4,362

 
6
 %
Research and development
28,974

 
26,142

 
12
 %
 
12
 %
 
2,832

 
11
 %
Selling, general and administrative
90,296

 
85,214

 
38
 %
 
39
 %
 
5,082

 
6
 %
Amortization of intangible assets
1,788

 
3,320

 
1
 %
 
1
 %
 
(1,532
)
 
(46
)%
Total operating expenses
195,417

 
184,673

 
83
 %
 
84
 %
 
10,744

 
6
 %
Operating income
39,904

 
34,927

 
17
 %
 
16
 %
 
4,977

 
14
 %
Interest expense, net
(6,460
)
 
(6,172
)
 
(3
)%
 
(3
)%
 
(288
)
 
5
 %
Other income (expense), net
513

 
(100
)
 
 %
 
 %
 
613

 
(613
)%
Income before income taxes
33,957

 
28,655

 
14
 %
 
13
 %
 
5,302

 
19
 %
Provision for income taxes
6,658

 
(9,246
)
 
2
 %
 
(4
)%
 
15,904

 
(172
)%
Net income
$
27,299

 
$
37,901

 
12
 %
 
17
 %
 
(10,602
)
 
(28
)%
Number of employees at quarter end
3,358

 
3,167

 
 
 
 
 
191

 
6
 %
 
 
 
 
 
 
 
 
 
 
 
 
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.
The cost of revenue expenses increased $4.4 million to $74.4 million during the quarter ended December 31, 2017 from $70.0 million during the quarter ended December 31, 2016. The increase was primarily attributable to a $1.7 million increase in allocated facilities and infrastructure costs and a $1.3 million increase in personnel and labor costs. Cost of revenues as a percentage of revenues was 32% during the quarter ended December 31, 2017, consistent with that incurred during the quarter ended December 31, 2016.
Over the next several quarters, we expect cost of revenues as a percentage of revenues will be consistent with that incurred during the quarter ended December 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 $2.8 million to $29.0 million during the quarter ended December 31, 2017 from $26.2 million during the quarter ended December 31, 2016, primarily attributable to our continued investment in cloud computing and SaaS, as well as other new products. Research and development expenses as a percentage of revenues was 12% during the quarter ended December 31, 2017, consistent with that incurred during the quarter ended December 31, 2016.

21

Table of Contents

Over the next several quarters, we expect research and development expenditures as a percentage of revenues will be consistent with that incurred during the quarter ended December 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 $5.1 million to $90.3 million during the quarter ended December 31, 2017 from $85.2 million during the quarter ended December 31, 2016, primarily attributable to an increase in personnel and labor costs as a result of increased headcount. Selling, general and administrative expenses as a percentage of revenues was 38% during the quarter ended December 31, 2017, materially consistent with that incurred during the quarter ended December 31, 2016.
Over the next several quarters, we expect selling, general and administrative expenses as a percentage of revenues will be consistent with that incurred during the quarter ended December 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.
The quarter over quarter decrease in amortization expense of $1.5 million was primarily attributable to certain intangible assets associated with our HNC and Adeptra acquisitions becoming fully amortized in August and September 2017, respectively.
Over the next several quarters we expect that amortization expense will be consistent with the amortization expense we recorded during the quarter ended December 31, 2017.
Interest Expense, Net
Interest expense includes primarily interest on the senior notes issued in May 2008 and July 2010, as well as interest and credit facility fees on the revolving line of credit. Our consolidated statements of income and comprehensive income include interest expense netted with interest income, which is derived primarily from the investment of funds in excess of our immediate operating requirements.
The quarter over quarter increase in interest expense of $0.3 million was primarily attributable to a higher average outstanding balance on our revolving line of credit, partially offset by the $72.0 million principal payment in July 2017 on the senior notes issued in July 2010 resulting in lower average debt balance for the quarter ended December 31, 2017.
Over the next several quarters we expect net interest expense will be higher than the net interest expense incurred during the quarter ended December 31, 2017.
Other Income (Expense), Net
Other income (expense), net consists primarily of realized investment gains/losses, exchange rate gains/losses resulting from remeasurement of foreign-currency-denominated receivable and cash balances into their respective functional currencies at period-end market rates, net of the impact of offsetting foreign currency forward contracts and other non-operating items.

22

Table of Contents

Provision for Income Taxes
The effective income tax rate was 19.6% and (32.3)% during the quarters ended December 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 three months ended December 31, 2017 was significantly impacted by recording the impact of the Tax Cuts and Jobs Act (the “Tax Act”), enacted on December 22, 2017 by the U.S. government. Among other provisions, the Tax Act reduces the federal corporate tax rate to 21% from the existing maximum rate of 35%, effective January 1, 2018, and imposes a deemed repatriation tax on previously untaxed accumulated earnings and profits (“E&P”) of foreign subsidiaries. We remeasured our deferred tax assets using a blended rate of 24.5% — by applying a pro-rated percentage of the number of days before and after the January 1, 2018 effective date — and recorded provisional charges for the remeasurement of the deferred tax assets of $5.6 million to our income tax expense related to long-term deferred tax assets and $1.3 million related to short-term deferred tax assets during the quarter ended December 31, 2017. We also recorded a provisional charge of $4.9 million to our income tax expense for the deemed repatriation transition tax. While we are able to make reasonable estimates of the impact of the reduction in corporate rate and the deemed repatriation transition tax, the final impact of the Tax Act may differ from these estimates, due to, among other things, changes in our interpretations and assumptions, additional guidance that may be issued by the I.R.S., and actions we may take. We are continuing to gather additional information to determine the final impact.
Operating Income
The following tables set forth certain summary information on a segment basis related to our operating income for the quarters ended December 31, 2017 and 2016:
 
Quarter Ended December 31,
 
Period-to-Period Change
 
Period-to-Period
Percentage Change
Segment
2017
 
2016
 
 
 
(In thousands)
 
(In thousands)
 
 
Applications
$
38,790

 
$
34,968

 
$
3,822

 
11
 %
Scores
54,028

 
46,063

 
7,965

 
17
 %
Decision Management Software
(7,856
)
 
(3,632
)
 
(4,224
)
 
116
 %
Corporate expenses
(26,760
)
 
(24,633
)
 
(2,127
)
 
9
 %
Total segment operating income
58,202

 
52,766

 
5,436

 
10
 %
Unallocated share-based compensation
(16,510
)
 
(14,519
)
 
(1,991
)
 
14
 %
Unallocated amortization expense
(1,788
)
 
(3,320
)
 
1,532

 
(46
)%
Operating income
$
39,904

 
$
34,927

 
4,977

 
14
 %
Applications
 
Quarter Ended 
 December 31,
 
Percentage of
Revenues
 
2017
 
2016
 
2017
 
2016
 
(In thousands)
 
 
 
 
Segment revenues
$
141,409

 
$
134,765

 
100
 %
 
100
 %
Segment operating expense
(102,619
)
 
(99,797
)
 
(73
)%
 
(74
)%
Segment operating income
$
38,790

 
$
34,968

 
27
 %
 
26
 %

23

Table of Contents


Scores 
 
Quarter Ended 
 December 31,
 
Percentage of
Revenues
 
2017
 
2016
 
2017
 
2016
 
(In thousands)
 
 
 
 
Segment revenues
$
69,915

 
$
59,382

 
100
 %
 
100
 %
Segment operating expense
(15,887
)
 
(13,319
)
 
(23
)%
 
(22
)%
Segment operating income
$
54,028

 
$
46,063

 
77
 %
 
78
 %
Decision Management Software 

 
Quarter Ended 
 December 31,
 
Percentage of
Revenues
 
2017
 
2016
 
2017
 
2016
 
(In thousands)
 
 
 
 
Segment revenues
$
23,997

 
$
25,453

 
100
 %
 
100
 %
Segment operating expense
(31,853
)
 
(29,085
)
 
(133
)%
 
(114
)%
Segment operating loss
$
(7,856
)
 
$
(3,632
)
 
(33
)%
 
(14
)%
The quarter over quarter $5.0 million increase in operating income was attributable to a $15.7 million increase in segment revenues and a $1.5 million decrease in amortization cost, partially offset by an $8.1 million increase in segment operating expenses, a $2.1 million increase in corporate expenses and a $2.0 million increase in share-based compensation cost.
At the segment level, the quarter over quarter $5.5 million increase in segment operating income was the result of an $8.0 million increase in our Scores segment operating income, a $3.8 million increase in our Applications segment operating income, partially offset by a $4.2 million increase in our Decision Management Software segment operating loss and a $2.1 million increase in corporate expense.
The quarter over quarter $3.8 million increase in Applications segment operating income was due to a $6.6 million increase in segment revenues, partially offset by a $2.8 million increase in segment operating expenses. Segment operating income as a percentage of segment revenue for Applications was 27%, materially consistent with the quarter ended December 31, 2016.
The quarter over quarter $8.0 million increase in Scores segment operating income was due to a $10.5 million increase in segment revenue, partially offset by a $2.5 million increase in segment operating expenses. Segment operating income as a percentage of segment revenue for Scores was 77%, materially consistent with the quarter ended December 31, 2016.
The quarter over quarter $4.2 million increase in Decision Management Software segment operating loss was due to a $2.8 million increase in segment operating expenses and a $1.4 million decrease in segment revenue. Segment operating margin for Decision Management Software decreased to a negative 33% from a negative 14% primarily due to a decrease in sales of our higher-margin software products, as well as our continued investment in cloud infrastructure operations.
CAPITAL RESOURCES AND LIQUIDITY
Outlook
As of December 31, 2017, we had $94.2 million in cash and cash equivalents, which included $87.6 million held off-shore by our foreign subsidiaries. We believe these balances, as well as available borrowings from our $600 million revolving line of credit and anticipated cash flows from operating activities, will be sufficient to fund our working and other capital requirements as well as the $131.0 million principal payment due in May 2018 on our senior notes issued in May 2008. Under our current financing arrangements, we have no other significant debt obligations maturing over the next twelve months. Additionally, though we do not anticipate the need to repatriate any undistributed earnings from our foreign subsidiaries for the foreseeable future, we may take advantage of opportunities where we are able to repatriate these earnings to the United States without material incremental tax provision.

24

Table of Contents

In the normal course of business, we evaluate the merits of acquiring technology or businesses, or establishing strategic relationships with or investing in these businesses. We may elect to use available cash and cash equivalents to fund such activities in the future. In the event additional needs for cash arise, or if we refinance our existing debt, we may raise additional funds from a combination of sources, including the potential issuance of debt or equity securities. Additional financing might not be available on terms favorable to us, or at all. If adequate funds were not available or were not available on acceptable terms, our ability to take advantage of unanticipated opportunities or respond to competitive pressures could be limited.
Summary of Cash Flows 
 
Quarter Ended December 31,
 
Period-to-Period Change
 
2017
 
2016
 
 
(In thousands)
Cash provided by (used in):
 
 
 
 
 
Operating activities
$
28,777

 
$
32,978

 
$
(4,201
)
Investing activities
(5,979
)
 
(4,319
)
 
(1,660
)
Financing activities
(34,677
)
 
(12,995
)
 
(21,682
)
Effect of exchange rate changes on cash
474

 
(3,489
)
 
3,963

Increase (decrease) in cash and cash equivalents
$
(11,405
)
 
$
12,175

 
(23,580
)

Cash Flows from Operating Activities
Our primary method for funding operations and growth has been through cash flows generated from operating activities. Net cash provided by operating activities decreased to $28.8 million during the quarter ended December 31, 2017 from $33.0 million during the quarter ended December 31, 2016. The $4.2 million decrease was mainly attributable to a $4.6 million decrease that resulted from timing of receipts and payments in our ordinary course of business.
Cash Flows from Investing Activities
Net cash used in investing activities increased to $6.0 million for quarter ended December 31, 2017 from $4.3 million for the quarter ended December 31, 2016. The $1.7 million increase was mainly attributable to a $1.9 million increase in purchases of marketable securities.
Cash Flows from Financing Activities
Net cash used in financing activities increased to $34.7 million for the quarter ended December 31, 2017 from $13.0 million for the quarter ended December 31, 2016. The $21.7 million increase was mainly due to a $24.8 million increase in repurchases of common stock, a $3.3 million increase in taxes paid related to net share settlement of equity awards and a $3.0 million decrease in proceeds from the exercise of stock options, partially offset by a $9.0 million increase in proceeds, net of payments, from our revolving line of credit.
Repurchases of Common Stock
In July 2016, our Board of Directors approved a stock repurchase program following the completion of our previous program. This program was open-ended and authorized repurchases of shares of our common stock up to an aggregate cost of $250.0 million in the open market or in negotiated transactions. In October 2017, our Board of Directors approved a new stock repurchase program following the completion of the July 2016 program. The new program is open-ended and authorizes repurchases of shares of our common stock up to an aggregate cost of $250.0 million in the open market or in negotiated transactions.
Pursuant to the July 2016 and October 2017 programs, we repurchased 334,918 shares of our common stock at a total repurchase price of $49.6 million during the quarter ended December 31, 2017. We had $237.0 million remaining under the October 2017 authorization as of December 31, 2017.

25

Table of Contents

Revolving Line of Credit
On November 17, 2017, we amended our credit agreement with a syndicate of banks, increasing our borrowing capacity under the unsecured revolving line of credit to $600 million. The revolving line of credit 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 December 31, 2017, we had $420.0 million in borrowings outstanding at a weighted average interest rate of 2.655% and were in compliance with all financial covenants under this credit facility.
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 2010 Senior Notes’ weighted average interest rate is 5.6% and the weighted average maturity is 9.8 years. The Senior Notes are subject to certain restrictive covenants that are substantially similar to those in the credit agreement for the revolving credit facility, including maintenance of consolidated leverage and fixed charge coverage ratios. The purchase agreements for the Senior Notes also include covenants typical of unsecured facilities. As of December 31, 2017, the carrying value of the Senior Notes was $243.8 million and we were in compliance with all financial covenants under these facilities.
Off-Balance Sheet Arrangements
We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
We prepare our consolidated financial statements in conformity with U.S. generally accepted accounting principles. These accounting principles require management to make certain judgments and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. We periodically evaluate our estimates including those relating to revenue recognition, goodwill and other intangible assets resulting from business acquisitions, share-based compensation, income taxes and contingencies and litigation. We base our estimates on historical experience and various other assumptions that we believe to be reasonable based on the specific circumstances, the results of which form the basis for making judgments about the carrying value of certain assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

We believe the following critical accounting policies involve the most significant judgments and estimates used in the preparation of our consolidated financial statements:

26

Table of Contents

Revenue Recognition
Software Licenses
Software license fee revenue is recognized when persuasive evidence of an arrangement exists, software is made available to our customers, the fee is fixed or determinable and collection is probable. The determination of whether fees are fixed or determinable and collection is probable involves the use of assumptions. If at the outset of an arrangement we determine that the arrangement fee is not fixed or determinable, revenue is deferred until the arrangement fee becomes fixed or determinable, assuming all other revenue recognition criteria have been met. If at the outset of an arrangement we determine that collectability is not probable, revenue is deferred until the earlier of when collectability becomes probable or the receipt of payment. If there is uncertainty as to the customer’s acceptance of our deliverables, revenue is not recognized until the earlier of receipt of customer acceptance, expiration of the acceptance period, or when we can demonstrate we meet the acceptance criteria. We evaluate contract terms and customer information to ensure that these criteria are met prior to our recognition of license fee revenue.
We use the residual method to recognize revenue when a software arrangement includes one or more elements to be delivered at a future date provided the following criteria are met: (i) vendor-specific objective evidence (“VSOE”) of the fair value does not exist for one or more of the delivered items but exists for all undelivered elements, (ii) all other applicable revenue recognition criteria are met and (iii) the fair value of all of the undelivered elements is less than the arrangement fee. VSOE of fair value is based on the normal pricing practices for those products and services when sold separately by us and customer renewal rates for post-contract customer support services. Under the residual method, the fair value of the undelivered elements is deferred and the remaining portion of the arrangement fee is recognized as revenue. If evidence of the fair value of one or more undelivered elements does not exist, the revenue is deferred and recognized when delivery of those elements occurs or when fair value can be established. Changes to the elements in a software arrangement, the ability to identify VSOE for those elements, the fair value of the respective elements, and change to a product’s estimated life cycle could materially impact the amount of earned and unearned revenue.
Revenues from post-contract customer support services, such as software maintenance, are recognized on a straight-line basis over the term of the support period. The majority of our software maintenance agreements provide technical support as well as unspecified software product upgrades and releases when and if made available by us during the term of the support period.
Transactional-Based Revenues
Transactional-based revenue is recognized when persuasive evidence of an arrangement exists, fees are fixed or determinable, and collection is probable. Revenues from our credit scoring, data processing, data management and SaaS subscription services are recognized as these services are performed. Revenues from transactional or unit-based license fees under software license arrangements, credit scoring, data processing, data management and SaaS subscription services agreements are recognized based on minimum contractual amounts or on system usage that exceeds minimum contractual amounts. Certain of our transactional-based revenues are based on transaction or active account volumes as reported by our clients. In instances where volumes are reported to us in arrears, we estimate volumes based on preliminary customer transaction information or average actual reported volumes for an immediate trailing period. Differences between our estimates and actual final volumes reported are recorded in the period in which actual volumes are reported. We have not experienced significant variances between our estimates and actual reported volumes in the past and anticipate that we will be able to continue to make reasonable estimates in the future. If for some reason we were unable to reasonably estimate transaction volumes in the future, revenue may be deferred until actual customer data is received, and this could have a material impact on our consolidated results of operations.

Consulting Services
We provide consulting, training, model development and software integration services under both hourly-based time and materials and fixed-priced contracts. Revenues from these services are generally recognized as the services are performed. For fixed-price service contracts, we use a proportionate performance model with hours as the input method of attribution to determine progress towards completion, with consideration also given to output measures, such as contract milestones, when applicable. In such instances, management is required to estimate the total estimated hours of the project. Adjustments to estimates are made in the period in which the facts requiring such revisions become known and, accordingly, recognized revenues and profits are subject to revisions as the contract progresses to completion. Estimated losses, if any, are recorded in the period in which current estimates of total contract revenue and contract costs indicate a loss. If substantive uncertainty related to customer acceptance of services exists, we defer the associated revenue until the contract is completed. We have not experienced significant variances between our estimates and actual hours in the past and anticipate that we will be able to continue to make reasonable estimates in the future. If for some reason we are unable to accurately estimate the input measures, revenue would be deferred until the contract is complete, and this could have a material impact on our consolidated results of operations.

27

Table of Contents

Services that are sold in connection with software license arrangements generally qualify for separate accounting from the license element because they do not involve significant production, modification or customization of our products and are not otherwise considered to be essential to the functionality of our software. In arrangements where the professional services do not qualify for separate accounting from the license element, the combined software license and professional services revenue are recognized based on contract accounting using either the percentage-of-completion or completed-contract method.
Multiple-Deliverable Arrangements including Non-Software
When we enter into a multiple-deliverable arrangement that includes non-software, each deliverable is accounted for as a separate unit of accounting if the following criteria are met: (i) the delivered item or items have value to the customer on a standalone basis and (ii) for an arrangement that includes a general right of return relative to the delivered item(s), delivery or performance of the undelivered item(s) is considered probable and substantially in our control. We consider a deliverable to have standalone value if we sell this item separately or if the item is sold by another vendor or could be resold by the customer; for example, we conclude professional services offered along with our SaaS subscription services typically have standalone value using this criteria. Further, our revenue arrangements generally do not include a general right of return relative to delivered products. Revenue for multiple element arrangements is allocated to the software and non-software deliverables based on a relative selling price. We use VSOE in our allocation of arrangement consideration when it is available. We define VSOE as a median price of recent standalone transactions that are priced within a narrow range, as defined by us. If a product or service is seldom sold separately, it is unlikely that we can determine VSOE. In circumstances when VSOE does not exist, we then assess whether we can obtain third-party evidence (“TPE”) of the selling price. It may be difficult for us to obtain sufficient information on competitor pricing to substantiate TPE and therefore we may not always be able to use TPE. When we are unable to establish selling price using VSOE or TPE, we use estimated selling price (“ESP”) in our allocation of arrangement consideration. The objective of ESP is to determine the price at which we would transact if the product or service were sold by us on a standalone basis. Our determination of ESP involves weighting several factors based on the specific facts and circumstances of each arrangement. The factors include, but are not limited to, geographies, market conditions, gross margin objectives, pricing practices and controls, customer segment pricing strategies and the product lifecycle. Historically, there have been no significant changes in our ESP used in allocation of arrangement consideration. We do not believe there is a reasonable likelihood there will be a material change in the future estimates.
If a deliverable does not have standalone value because the aforementioned criteria are not met, we combine it with the other applicable undelivered item(s) within the arrangement and account for the multiple deliverables as one combined unit of accounting. For example, for hosting arrangements requiring a highly specialized and unique set of initial implementation and setup services prior to the commencement of hosting services, we typically conclude that these implementation or setup services do not have value to the customer on a stand-alone basis; therefore, we combine them with the hosting services as a combined unit of accounting. Revenue is recognized upon commencement of our hosting services over the expected life of the customer relationship.
Gross vs. Net Revenue Reporting
We apply accounting guidance to determine whether we report revenue for certain transactions based upon the gross amount billed to the customer, or the net amount retained by us. In accordance with the guidance we record revenue on a gross basis for sales in which we have acted as the principal and on a net basis for those sales in which we have in substance acted as an agent or broker in the transaction.
Business Combinations
Accounting for our acquisitions requires us to recognize, separately from goodwill, the assets acquired and the liabilities assumed at their acquisition-date fair values. Goodwill as of the acquisition date is measured as the excess of consideration transferred and the net of the acquisition-date fair values of the assets acquired and the liabilities assumed. While we use our best estimates and assumptions to accurately value assets acquired and liabilities assumed at the acquisition date, our estimates are inherently uncertain and subject to refinement. As a result, during the measurement period, which may be up to one year from the acquisition date, we record adjustments to the assets acquired and liabilities assumed with the corresponding offset to goodwill. Upon the conclusion of the measurement period or final determination of the values of assets acquired or liabilities assumed, whichever comes first, any subsequent adjustments are recorded to our consolidated statements of income and comprehensive income.

28

Table of Contents

Accounting for business combinations requires our management to make significant estimates and assumptions, especially at the acquisition date, including our estimates for intangible assets, contractual obligations assumed, pre-acquisition contingencies and contingent consideration, where applicable. If we cannot reasonably determine the fair value of a pre-acquisition contingency (non-income tax related) by the end of the measurement period, we will recognize an asset or a liability for such pre-acquisition contingency if: (i) it is probable that an asset existed or a liability had been incurred at the acquisition date and (ii) the amount of the asset or liability can be reasonably estimated. Although we believe the assumptions and estimates we have made in the past have been reasonable and appropriate, they are based in part on historical experience and information obtained from the management of the acquired companies and are inherently uncertain. Subsequent to the measurement period, changes in our estimates of such contingencies will affect earnings and could have a material effect on our consolidated results of operations and financial position.
Examples of critical estimates in valuing certain of the intangible assets we have acquired include but are not limited to: (i)future expected cash flows from software license sales, support agreements, consulting contracts, other customer contracts and acquired developed technologies and patents; (ii) expected costs to develop the in-process research and development into commercially viable products and estimated cash flows from the projects when completed; and (iii) the acquired company’s brand and competitive position, as well as assumptions about the period of time the acquired brand will continue to be used in the combined company’s product portfolio. Unanticipated events and circumstances may occur that may affect the accuracy or validity of such assumptions, estimates or actual results. Historically, there have been no significant changes in our estimates or assumptions. To the extent a significant acquisition is made during a fiscal year, as appropriate we will expand the discussion to include specific assumptions and inputs used to determine the fair value of our acquired intangible assets.
In addition, uncertain tax positions and tax-related valuation allowances assumed in connection with a business combination are initially estimated as of the acquisition date. We reevaluate these items quarterly based upon facts and circumstances that existed as of the acquisition date with any adjustments to our preliminary estimates being recorded to goodwill provided that we are within the measurement period. Subsequent to the measurement period or our final determination of the tax allowance’s or contingency’s estimated value, whichever comes first, changes to these uncertain tax positions and tax-related valuation allowances will affect our provision for income taxes in our consolidated statements of income and comprehensive income and could have a material impact on our consolidated results of operations and financial position. Historically, there have been no significant changes in our valuation allowances or uncertain tax positions as it relates to business combinations. We do not believe there is a reasonable likelihood there will be a material change in the future estimates.
Goodwill, Acquisition Intangibles and Other Long-Lived Assets - Impairment Assessment
Goodwill represents the excess of cost over the fair value of identifiable assets acquired and liabilities assumed in business combinations. We assess goodwill for impairment for each of our reporting units on an annual basis during the fourth quarter using a July 1 measurement date unless circumstances require a more frequent measurement. We have determined that our reporting units are the same as our reportable segments. When evaluating goodwill for impairment, we may first perform an assessment qualitatively whether it is more likely than not that a reporting unit's carrying amount exceeds its fair value, referred to as a “step zero” approach. If, based on the review of the qualitative factors, we determine it is not more likely than not that the fair value of a reporting unit is less than its carrying value, we would bypass the two-step impairment test. Events and circumstances we consider in performing the “step zero” qualitative assessment include macro-economic conditions, market and industry conditions, internal cost factors, share price fluctuations, and the operational stability and the overall financial performance of the reporting units. If we conclude that it is more likely than not that a reporting unit's fair value is less than its carrying amount, we would perform the first step (“step one”) of the two-step impairment test and calculate the estimated fair value of the reporting unit by using discounted cash flow valuation models and by comparing our reporting units to guideline publicly-traded companies. These methods require estimates of our future revenues, profits, capital expenditures, working capital, and other relevant factors, as well as selecting appropriate guideline publicly-traded companies for each reporting unit. We estimate these amounts by evaluating historical trends, current budgets, operating plans, industry data, and other relevant factors. Using assumptions that are different from those used in our estimates, but in each case reasonable, could produce significantly different results and materially affect the determination of fair value and/or goodwill impairment for each reporting unit. For example, if the economic environment impacts our forecasts beyond what we have anticipated, it could cause the fair value of a reporting unit to fall below its respective carrying value.
For fiscal 2017, we elected to proceed directly to the step one quantitative analysis for all of our reporting units, as three years had elapsed since the date of our previous quantitative valuation. There was a substantial excess of fair value over carrying value for each of our reporting units and we determined goodwill was not impaired for any of our reporting units for fiscal 2017.

29

Table of Contents

Our intangible assets that have finite useful lives and other long-lived assets are assessed for potential impairment when there is evidence that events and circumstances related to our financial performance and economic environment indicate the carrying amount of the assets may not be recoverable. When impairment indicators are identified, we test for impairment using undiscounted cash flows. If such tests indicate impairment, then we measure and record the impairment as the difference between the carrying value of the asset and the fair value of the asset. Significant management judgment is required in forecasting future operating results used in the preparation of the projected cash flows. Should different conditions prevail, material write downs of our intangible assets or other long-lived assets could occur. We review the estimated remaining useful lives of our acquired intangible assets at each reporting period. A reduction in our estimate of remaining useful lives, if any, could result in increased annual amortization expense in future periods.
As discussed above, while we believe that the assumptions and estimates utilized were appropriate based on the information available to management, different assumptions, judgments and estimates could materially affect our impairment assessments for our goodwill, acquired intangibles with finite lives and other long-lived assets. Historically, there have been no significant changes in our estimates or assumptions that would have had a material impact for our goodwill or intangible assets impairment assessment. We believe our projected operating results and cash flows would need to be significantly less favorable to have a material impact on our impairment assessment. However, based upon our historical experience with operations, we do not believe there is a reasonable likelihood of a significant change in our projections.
Share-Based Compensation
We measure stock-based compensation cost at the grant date based on the fair value of the award and recognize it as expense, net of estimated forfeitures, over the vesting or service period, as applicable, of the stock award (generally three to four years). We use the Black-Scholes valuation model to determine the fair value of our stock options and a Monte Carlo valuation model to determine the fair value of our market share units. Our valuation models and generally accepted valuation techniques require us to make assumptions and to apply judgment to determine the fair value of our awards. These assumptions and judgments include estimating the volatility of our stock price, expected dividend yield, employee turnover rates and employee stock option exercise behaviors. Historically, there have been no material changes in our estimates or assumptions. We do not believe there is a reasonable likelihood there will be a material change in the future estimates or assumptions.
Income Taxes
We estimate our income taxes based on the various jurisdictions where we conduct business, which involves significant judgment in determining our income tax provision. We estimate our current tax liability using currently enacted tax rates and laws and assess temporary differences that result from differing treatments of certain items for tax and accounting purposes. These differences result in deferred tax assets and liabilities recorded on our consolidated balance sheets using the currently enacted tax rates and laws that will apply to taxable income for the years in which those tax assets are expected to be realized or settled. We then assess the likelihood our deferred tax assets will be realized and to the extent we believe realization is not more likely than not, we establish a valuation allowance. When we establish a valuation allowance or increase this allowance in an accounting period, we record a corresponding income tax expense in our consolidated statements of income and comprehensive income. In assessing the need for the valuation allowance, we consider future taxable income in the jurisdictions we operate, our ability to carry back tax attributes to prior years, an analysis of our deferred tax assets and the periods over which they will be realizable, and ongoing prudent and feasible tax planning strategies. An increase in the valuation allowance would have an adverse impact, which could be material, on our income tax provision and net income in the period in which we record the increase. We have historically had minimal changes in our valuation allowances related to deferred tax assets.
We recognize and measure benefits for uncertain tax positions using a two-step approach. The first step is to evaluate the tax position taken or expected to be taken in a tax return by determining if the technical merits of the tax position indicate it is more likely than not that the tax position will be sustained upon audit, including resolution of any related appeals or litigation processes. For tax positions more likely than not of being sustained upon audit, the second step is to measure the tax benefit as the largest amount more than 50% likely of being realized upon settlement. Significant judgment is required to evaluate uncertain tax positions and they are evaluated on a quarterly basis. Our evaluations are based upon a number of factors, including changes in facts or circumstances, changes in tax law, correspondence with tax authorities during the course of audits and effective settlement of audit issues. Changes in the recognition or measurement of uncertain tax positions could result in material increases or decreases in our income tax expense in the period in which we make the change, which could have a material impact on our effective tax rate and operating results. Historically, settlements related to our unrecognized tax benefits have been minimal.
A description of our accounting policies associated with tax-related contingencies and valuation allowances assumed as part of a business combination is provided under “Business Combinations” above.
Contingencies and Litigation

30

Table of Contents

We are subject to various proceedings, lawsuits and claims relating to products and services, technology, labor, stockholder and other matters. We are required to assess the likelihood of any adverse outcomes and the potential range of probable losses in these matters. If the potential loss is considered probable and the amount can be reasonably estimated, we accrue a liability for the estimated loss. If the potential loss is considered less than probable or the amount cannot be reasonably estimated, disclosure of the matter is considered. The amount of loss accrual or disclosure, if any, is determined after analysis of each matter, and is subject to adjustment if warranted by new developments or revised strategies. Due to uncertainties related to these matters, accruals or disclosures are based on the best information available at the time. Significant judgment is required in both the assessment of likelihood and in the determination of a range of potential losses. Revisions in the estimates of the potential liabilities could have a material impact on our consolidated financial position or consolidated results of operations. Historically, there have been no material changes in our estimates or assumptions. We do not believe there is a reasonable likelihood there will be a material change in the future estimates.
New Accounting Pronouncements
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.
We have established a cross-functional implementation team consisting of representatives across the organization to address the scope of work required to implement the recognition and disclosure requirements under the new standard. This cross-functional implementation team has developed a project plan, which includes evaluating customer contracts across the organization, developing policies, processes and tools to report financial results, and implementing and evaluating our internal controls over financial reporting that will be necessary under the new standard. We currently plan to adopt Topic 606 in the first quarter of our fiscal 2019 using the retrospective transition method. Our ability to adopt Topic 606 using the full retrospective method is dependent on system readiness, and the completion of our analysis of information necessary to restate prior period financial statements. As we continue to assess the new standard along with industry trends and additional interpretive guidance, we may adjust our implementation plan accordingly.
We are continuing to assess the impact of adopting Topic 606 on our consolidated financial statements and believe the new standard will impact the following policies and disclosures:
Timing of revenue recognition of license revenue on term licenses and transactional revenue on guaranteed minimum fees related to our on-premises software products. Under the new standard, we expect to recognize revenue when control of the license is transferred to the customer, rather than at the date payments become due and payable or ratably over the term of the contract required under the current standard;

31

Table of Contents

Presentation of contract balances. Under the new standard, when we enter into noncancellable contracts that provide unconditional rights to payment from our customers for services that we have not yet completed providing or services we will provide in the near future, we expect to present the unconditional rights as receivables, regardless of whether cash has been received from customers;
Required disclosures including information about remaining transaction price and when we expect to recognize revenue; and
Accounting for commissions under the new standard will result in the deferral of incremental commission costs for obtaining contracts.
We do not currently expect Topic 606 to have a significant effect on the timing of revenue recognition for our maintenance or professional services revenues, or SaaS contracts.
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 as of the beginning of an annual reporting period for which financial statements (interim or annual) have not been issued. We do not believe that adoption of ASU 2016-16 will have a significant impact 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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Market Risk Disclosures
We are exposed to market risk related to changes in interest rates and foreign exchange rates. We do not use derivative financial instruments for speculative or trading purposes.
Interest Rate
We maintain an investment portfolio consisting of bank deposits and money market funds. The funds provide daily liquidity and may be subject to interest rate risk and fall in value if market interest rates increase. We do not expect our operating results or cash flows to be affected to any significant degree by a sudden change in market interest rates. The following table presents the principal amounts and related weighted-average yields for our investments with interest rate risk at December 31, 2017 and September 30, 2017
 
December 31, 2017
 
September 30, 2017
 
Cost
Basis
 
Carrying
Amount
 
Average
Yield
 
Cost
Basis
 
Carrying
Amount
 
Average
Yield
 
(Dollars in thousands)
Cash and cash equivalents
$
94,213

 
$
94,213

 
0.48
%
 
$
105,618

 
$
105,618

 
0.56
%


32

Table of Contents

On May 7, 2008, we issued $275 million of senior notes to a group of institutional investors in a private placement (the “2008 Senior Notes”). On July 14, 2010 we issued an additional $245 million of senior notes to a group of institutional investors in a private placement (the “2010 Senior Notes” and, with the 2008 Senior Notes, the “Senior Notes”). The fair value of the Senior Notes may increase or decrease due to various factors, including fluctuations in market interest rates and fluctuations in general economic conditions. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations – Capital Resources and Liquidity” for additional information on the Senior Notes. The following table presents the carrying amounts and fair values for the Senior Notes at December 31, 2017 and September 30, 2017:
 
December 31, 2017
 
September 30, 2017
 
Carrying
Amounts
 
Fair Value
 
Carrying
Amounts
 
Fair Value
 
(In thousands)
The 2008 Senior Notes
$
131,000

 
$
132,814

 
$
131,000

 
$
134,250

The 2010 Senior Notes
113,000

 
117,669

 
113,000

 
119,106

Debt issuance costs
(166
)
 
(166
)
 
(199
)
 
(199
)
       Total
$
243,834

 
$
250,317

 
$
243,801

 
$
253,157

We have a $600 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. A change in interest rates on this variable rate debt impacts the interest incurred and cash flows, but does not impact the fair value of the instrument. We had $420.0 million in borrowings outstanding at a weighted average interest rate of 2.655% under the credit facility as of December 31, 2017.

Foreign Currency Forward Contracts
We maintain a program to manage our foreign exchange rate risk on existing foreign-currency-denominated receivable and cash balances by entering into forward contracts to sell or buy foreign currencies. At period end, foreign-currency-denominated receivable and cash balances held by our various reporting entities are remeasured into their respective functional currencies at current market rates. The change in value from this remeasurement is then reported as a foreign exchange gain or loss for that period in our accompanying condensed consolidated statements of income and comprehensive income and the resulting gain or loss on the forward contract mitigates the foreign exchange rate risk of the associated assets. All of our foreign currency forward contracts have maturity periods of less than three months. Such derivative financial instruments are subject to market risk.
The following tables summarize our outstanding foreign currency forward contracts, by currency, at December 31, 2017 and September 30, 2017:

33

Table of Contents

 
December 31, 2017
 
Contract Amount
 
Fair Value
 
Foreign
Currency
 
US$
 
US$
 
(In thousands)
Sell foreign currency:
 
 
 
 
 
 
Euro (EUR)
EUR 
7,350

 
$
8,825

 
$

Buy foreign currency:
 
 
 
 
 
 
British pound (GBP)
GBP 
5,398

 
$
7,300

 
$

Singapore dollar (SGD)
SGD
7,734

 
$
5,800

 
$

 
 
 
 
 
 
 
 
September 30, 2017
 
Contract Amount
 
Fair Value
 
Foreign
Currency
 
US$
 
US$
 
(In thousands)
Sell foreign currency:
 
 
 
 
 
 
Euro (EUR)
EUR 
5,050

 
$
5,968

 
$

Buy foreign currency:
 
 
 
 
 
 
British pound (GBP)
GBP 
9,341

 
$
12,500

 
$

The foreign currency forward contracts were entered into on December 31, 2017 and September 30, 2017, respectively; therefore, their fair value was $0 on each of these dates.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
An evaluation was carried out under the supervision and with the participation of FICO’s management, including the Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of FICO’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this quarterly report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that FICO’s disclosure controls and procedures are effective to ensure that information required to be disclosed by FICO in reports that it files or submits under the Exchange Act is (i) recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and (ii) accumulated and communicated to the Chief Executive Officer and Chief Financial Officer to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
No change in FICO’s internal control over financial reporting was identified in connection with the evaluation required by Rule 13a-15(d) of the Exchange Act that occurred during the period covered by this quarterly report and that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

34

Table of Contents

PART II – OTHER INFORMATION
Item 1. Legal Proceedings
Not Applicable.
Item 1A. Risk Factors
Risks Related to Our Business

We continue to expand the pursuit of our Decision Management strategy, and we may not be successful, which could cause our growth prospects and results of operations to suffer.

We continue to expand the pursuit of our business objective to become a leader in helping businesses automate and improve decisions across their enterprises, an approach that we commonly refer to as Decision Management, or “DM.” Our DM strategy is designed to enable us to increase our business by selling multiple products to clients, as well as to enable the development of custom client solutions that may lead to opportunities to develop new proprietary scores or other new proprietary products. Our DM strategy is also increasingly focused on the delivery of our products through cloud-based deployments. The market may be unreceptive to our general DM business approach, including being unreceptive to purchasing multiple products from us, unreceptive to our customized solutions, or unreceptive to our cloud-based offerings. As we continue to pursue our DM strategy, we may experience volatility in our revenues and operating results caused by various factors, including differences in revenue recognition treatment between our cloud-based offerings and on-premise software licenses, the timing of investments and other expenditures necessary to develop and operate our cloud-based offerings, and the adoption of new sales and delivery methods. If our DM strategy is not successful, we may not be able to grow our business, growth may occur more slowly than we anticipate, or our revenues and profits may decline.

We derive a substantial portion of our revenues from a small number of products and services, and if the market does not continue to accept these products and services, our revenues will decline.

We expect that revenues derived from our scoring solutions, fraud solutions, customer communication services, customer management solutions and decision management software will continue to account for a substantial portion of our total revenues for the foreseeable future. Our revenues will decline if the market does not continue to accept these products and services. Factors that might affect the market acceptance of these products and services include the following:

changes in the business analytics industry;
changes in technology;
our inability to obtain or use key data for our products;
saturation or contraction of market demand;
loss of key customers;
industry consolidation;
failure to successfully adopt cloud-based technologies;
failure to execute our selling approach; and
inability to successfully sell our products in new vertical markets.

If we are unable to access new markets or develop new distribution channels, our business and growth prospects could suffer.

We expect that part of the growth that we seek to achieve through our DM strategy will be derived from the sale of DM products and service solutions in industries and markets we do not currently serve. We also expect to grow our business by delivering our DM solutions through additional distribution channels. If we fail to penetrate these industries and markets to the degree we anticipate utilizing our DM strategy, or if we fail to develop additional distribution channels, we may not be able to grow our business, growth may occur more slowly than we anticipate, or our revenues and profits may decline.


35

Table of Contents

If we are unable to develop successful new products or if we experience defects, failures and delays associated with the introduction of new products, our business could suffer serious harm.

Our growth and the success of our DM strategy depend upon our ability to develop and sell new products or suites of products, including the development and sale of our cloud-based product offerings. If we are unable to develop new products, or if we are not successful in introducing new products, we may not be able to grow our business or growth may occur more slowly than we anticipate. In addition, significant undetected errors or delays in new products or new versions of products may affect market acceptance of our products and could harm our business, financial condition or results of operations. In the past, we have experienced delays while developing and introducing new products and product enhancements, primarily due to difficulties developing models, acquiring data, and adapting to particular operating environments or certain client or other systems. We have also experienced errors or “bugs” in our software products, despite testing prior to release of the products. Software errors in our products could affect the ability of our products to work with other hardware or software products, could delay the development or release of new products or new versions of products, and could adversely affect market acceptance of our products. Errors or defects in our products that are significant, or are perceived to be significant, could result in rejection of our products, damage to our reputation, loss of revenues, diversion of development resources, an increase in product liability claims, and increases in service and support costs and warranty claims.

We rely on relatively few customers, as well as our contracts with the three major credit reporting agencies, for a significant portion of our revenues and profits. Many of our customers are significantly larger than we are and may have greater bargaining power. The businesses of our largest customers depend, in large part, on favorable macroeconomic conditions. If these customers are negatively impacted by weak global economic conditions, global economic volatility or the terms of these relationships otherwise change, our revenues and operating results could decline.

Most of our customers are relatively large enterprises, such as banks, credit card processors, insurance companies, healthcare firms, telecommunications providers, retailers and public agencies. As a result, many of our customers and potential customers are significantly larger than we are and may have sufficient bargaining power to demand reduced prices and favorable nonstandard terms.