Item 8. Financial Statements and Supplementary Data

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of

Fair Isaac Corporation

San Jose, California

We have audited the accompanying consolidated balance sheets of Fair Isaac Corporation and subsidiaries (the "Company") as of September 30, 2017 and 2016, and the related consolidated statements of income and comprehensive income, stockholders' equity, and cash flows for each of the three years in the period ended September 30, 2017. We also have audited the Company's internal control over financial reporting as of September 30, 2017, based on the criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company's management is responsible for these financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on these financial statements and an opinion on the Company's internal control over financial reporting based on our audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company and subsidiaries as of September 30, 2017 and 2016, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 2017, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of September 30, 2017, based on the criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.

/s/ Deloitte & Touche LLP
San Diego, CA
November 9, 2017

FAIR ISAAC CORPORATION

CONSOLIDATED BALANCE SHEETS

	September 30,
	2017				2016
	(In thousands, except par value data)
Assets
Current assets:
Cash and cash equivalents	$	105,618			$	75,926
Accounts receivable, net	168,586				167,786
Prepaid expenses and other current assets	36,727				23,926
Total current assets	310,931				267,638
Marketable securities available for sale	13,791				11,016
Other investments	11,724				10,920
Property and equipment, net	40,703				45,122
Goodwill	804,414				798,415
Intangible assets, net	21,185				33,619
Deferred income taxes	47,204				47,598
Other assets	5,668				6,348
Total assets	$	1,255,620			$	1,220,676
Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	19,510			$	22,952
Accrued compensation and employee benefits	77,610				71,216
Other accrued liabilities	32,104				27,780
Deferred revenue	55,431				47,129
Current maturities on debt	142,000				77,000
Total current liabilities	326,655				246,077
Long-term debt	462,801				493,624
Other liabilities	39,627				34,147
Total liabilities	829,083				773,848
Commitments and contingencies
Stockholders’ equity:
Preferred stock ($0.01 par value; 1,000 shares authorized; none issued and outstanding)	—				—
Common stock ($0.01 par value; 200,000 shares authorized, 88,857 shares issued and 30,243 and 30,935 shares outstanding at September 30, 2017 and September 30, 2016, respectively)	302				309
Paid-in-capital	1,195,431				1,188,913
Treasury stock, at cost (58,614 and 57,922 shares at September 30, 2017 and September 30, 2016, respectively)	(2,301,097		)		(2,136,760		)
Retained earnings	1,598,395				1,471,377
Accumulated other comprehensive loss	(66,494		)		(77,011		)
Total stockholders’ equity	426,537				446,828
Total liabilities and stockholders’ equity	$	1,255,620			$	1,220,676

See accompanying notes.

FAIR ISAAC CORPORATION

CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME

	Year Ended September 30,
	2017				2016				2015
	(In thousands, except per share data)
Revenues:
Transactional and maintenance	$	652,660			$	605,919			$	564,232
Professional services	179,569				169,738				151,773
License	99,940				105,699				122,776
Total revenues	932,169				881,356				838,781
Operating expenses:
Cost of revenues (1)	287,123				265,173				270,535
Research and development	110,870				103,669				98,824
Selling, general and administrative (1)	339,796				328,940				300,002
Amortization of intangible assets (1)	12,709				13,982				13,673
Restructuring and acquisition-related	4,471				—				18,242
Total operating expenses	754,969				711,764				701,276
Operating income	177,200				169,592				137,505
Interest expense, net	(25,790		)		(26,633		)		(29,150		)
Other income (expense), net	(86		)		1,610				883
Income before income taxes	151,324				144,569				109,238
Provision for income taxes	23,068				35,121				22,736
Net income	128,256				109,448				86,502
Other comprehensive income (loss):
Foreign currency translation adjustments	10,517				(26,296		)		(27,526		)
Comprehensive income	$	138,773			$	83,152			$	58,976
Basic earnings per share	$	4.16			$	3.52			$	2.75
Shares used in computing basic earnings per share	30,862				31,129				31,402
Diluted earnings per share	$	3.98			$	3.39			$	2.65
Shares used in computing diluted earnings per share	32,245				32,308				32,609

(1)	Cost of revenues and selling, general and administrative expenses exclude the amortization of intangible assets. See Note 7.

See accompanying notes.

FAIR ISAAC CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

Years Ended September 30, 2017, 2016 and 2015

(In thousands, except per share data)

	Common Stock																			Accumulated Other Comprehensive Loss				Total Stockholders’ Equity
	Shares			Par Value				Paid-in- Capital				Treasury Stock				Retained Earnings
Balance at September 30, 2014	32,047			$	320			$	1,133,154			$	(1,936,095	)		$	1,280,424			$	(23,189	)		$	454,614
Share-based compensation	—			—				45,308				—				—				—				45,308
Issuance of treasury stock under employee stock plans	954			10				(34,366		)		33,153				—				—				(1,203		)
Tax effect from share-based payment arrangements	—			—				12,530				—				—				—				12,530
Repurchases of common stock	(1,711	)		(17		)		—				(130,702		)		—				—				(130,719		)
Dividends paid	—			—				—				—				(2,508		)		—				(2,508		)
Net income	—			—				—				—				86,502				—				86,502
Foreign currency translation adjustments	—			—				—				—				—				(27,526		)		(27,526		)
Balance at September 30, 2015	31,290			313				1,156,626				(2,033,644		)		1,364,418				(50,715		)		436,998
Share-based compensation	—			—				55,509				—				—				—				55,509
Issuance of treasury stock under employee stock plans	980			10				(47,406		)		35,269				—				—				(12,127		)
Tax effect from share-based payment arrangements	—			—				24,184				—				—				—				24,184
Repurchases of common stock	(1,335	)		(14		)		—				(138,385		)		—				—				(138,399		)
Dividends paid	—			—				—				—				(2,489		)		—				(2,489		)
Net income	—			—				—				—				109,448				—				109,448
Foreign currency translation adjustments	—			—				—				—				—				(26,296		)		(26,296		)
Balance at September 30, 2016	30,935			309				1,188,913				(2,136,760		)		1,471,377				(77,011		)		446,828
Share-based compensation	—			—				61,222				—				—				—				61,222
Issuance of treasury stock under employee stock plans	774			8				(54,704		)		28,938				—				—				(25,758		)
Repurchases of common stock	(1,466	)		(15		)		—				(193,275		)		—				—				(193,290		)
Dividends paid	—			—				—				—				(1,238		)		—				(1,238		)
Net income	—			—				—				—				128,256				—				128,256
Foreign currency translation adjustments	—			—				—				—				—				10,517				10,517
Balance at September 30, 2017	30,243			$	302			$	1,195,431			$	(2,301,097	)		$	1,598,395			$	(66,494	)		$	426,537

See accompanying notes.

FAIR ISAAC CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

	Year Ended September 30,
	2017				2016				2015
	(In thousands)
Cash flows from operating activities:
Net income	$	128,256			$	109,448			$	86,502
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	36,214				31,633				33,889
Share-based compensation	61,222				55,509				45,308
Deferred income taxes	(6,049		)		(26,007		)		(5,934		)
Tax effect from share-based payment arrangements	—				24,184				12,530
Provision of doubtful accounts	1,640				2,011				—
Net loss on sales of property and equipment	14				6				2,210
Changes in operating assets and liabilities:
Accounts receivable	(1,265		)		(18,225		)		(4,602		)
Prepaid expenses and other assets	(7,115		)		12,848				(15,462		)
Accounts payable	(2,027		)		564				(3,672		)
Accrued compensation and employee benefits	6,464				17,079				(1,506		)
Other liabilities	(683		)		(4,282		)		4,113
Deferred revenue	8,973				5,500				(6,604		)
Net cash provided by operating activities	225,644				210,268				146,772
Cash flows from investing activities:
Purchases of property and equipment	(19,828		)		(21,969		)		(24,999		)
Cash paid for acquisitions, net of cash acquired	—				(5,683		)		(56,992		)
Distribution from (purchase of) cost method investees	(777		)		37				75
Net cash used in investing activities	(20,605		)		(27,615		)		(81,916		)
Cash flows from financing activities:
Proceeds from revolving line of credit	190,000				122,000				249,000
Payments on revolving line of credit	(84,000		)		(99,000		)		(116,000		)
Payments on senior notes	(72,000		)		(60,000		)		(71,000		)
Proceeds from issuance of treasury stock under employee stock plans	14,474				17,828				18,258
Taxes paid related to net share settlement of equity awards	(40,232		)		(29,955		)		(19,461		)
Dividends paid	(1,238		)		(2,489		)		(2,508		)
Repurchases of common stock	(187,629		)		(138,399		)		(130,719		)
Net cash used in financing activities	(180,625		)		(190,015		)		(72,430		)
Effect of exchange rate changes on cash	5,278				(2,832		)		(11,381		)
Increase (decrease) in cash and cash equivalents	29,692				(10,194		)		(18,955		)
Cash and cash equivalents, beginning of year	75,926				86,120				105,075
Cash and cash equivalents, end of year	$	105,618			$	75,926			$	86,120
Supplemental disclosures of cash flow information:
Cash paid for income taxes, net of refunds of $3,757, $11,363 and $1,592 during the years ended September 30, 2017, 2016 and 2015, respectively	$	31,315			$	10,855			$	33,752
Cash paid for interest	$	26,083			$	26,884			$	30,470
Supplemental disclosures of non-cash investing and financing activities:
Unsettled repurchases of common stock	$	5,661			$	—			$	—
Purchase of property and equipment included in accounts payable	$	1,751			$	3,287			$	436

See accompanying notes.

FAIR ISAAC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended September 30, 2017, 2016 and 2015

1. Nature of Business and Summary of Significant Accounting Policies

Fair Isaac Corporation

Incorporated under the laws of the State of Delaware, Fair Isaac Corporation (“FICO”) is a provider of analytic, software and data management products and services that enable businesses to automate, improve and connect decisions. FICO provides a range of analytical solutions, credit scoring and credit account management products and services to banks, credit reporting agencies, credit card processing agencies, insurers, retailers, healthcare organizations and public agencies.

In these consolidated financial statements, FICO is referred to as “we,” “us,” “our,” or “the Company.”

Principles of Consolidation and Basis of Presentation

The 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.

Cash and Cash Equivalents

Cash and cash equivalents consist of cash in banks and investments with an original maturity of 90 days or less at time of purchase.

Fair Value of Financial Instruments

The fair value of certain of our financial instruments, including cash and cash equivalents, receivables, other current assets, accounts payable, accrued compensation and employee benefits, other accrued liabilities and amounts outstanding under our revolving line of credit, approximate their carrying amounts because of the short-term maturity of these instruments. The fair values of our cash and cash equivalents and marketable security investments are disclosed in Note 4. The fair value of our derivative instruments is disclosed in Note 5. The fair value of our senior notes is disclosed in Note 10.

Investments

Management determines the appropriate classification of our investments in marketable debt and equity securities at the time of purchase, and re-evaluates this designation at each balance sheet date. While it is our intent to hold debt securities to maturity, our investments in U.S. government obligations and marketable equity and debt securities that have readily determinable fair values are classified as available-for-sale, as the sale of such securities may be required prior to maturity to implement management strategies. Therefore, such securities are carried at fair value with unrealized gains or losses related to these securities included in accumulated other comprehensive income (loss). The fair value of marketable securities is based upon inputs including quoted prices for identical or similar assets. Realized gains and losses are included in other income (expense), net on the consolidated statements of income and comprehensive income. The cost of investments sold is based on the specific identification method. Losses resulting from other than temporary declines in fair value are charged to operations. Investments with remaining maturities over one year are classified as long-term investments.

Our investments in equity securities of companies over which we do not have significant influence are accounted for under the cost method. The investment is originally recorded at cost and adjusted for additional contributions or distributions. Management periodically reviews cost-method investments for instances where fair value is less than the carrying amount and the decline in value is determined to be other than temporary. If the decline in value is judged to be other than temporary, the carrying amount of the security is written down to fair value and the resulting loss is charged to operations. We currently do not have investments in which we own 20% to 50% and exercise significant influence over operating and financial policies, therefore we do not account for any investment under the equity method.

FAIR ISAAC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended September 30, 2017, 2016 and 2015

Concentration of Risk

Financial instruments that potentially expose us to concentrations of risk consist primarily of cash and cash equivalents, marketable securities and accounts receivable, which are generally not collateralized. Our policy is to place our cash, cash equivalents, and marketable securities with high quality financial institutions, commercial corporations and government agencies in order to limit the amount of credit exposure. We have established guidelines relative to diversification and maturities for maintaining safety and liquidity. We generally do not require collateral from our customers, but our credit extension and collection policies include analyzing the financial condition of potential customers, establishing credit limits, monitoring payments, and aggressively pursuing delinquent accounts. We maintain allowances for potential credit losses.

A significant portion of our revenues are derived from the sales of products and services to the consumer credit and banking industries.

Property and Equipment

Property and equipment are recorded at cost less accumulated depreciation and amortization. Major renewals and improvements are capitalized, while repair and maintenance costs are expensed as incurred. Depreciation and amortization charges are calculated using the straight-line method over the following estimated useful lives:

	Estimated Useful Life
Data processing equipment and software	3 years
Office furniture and equipment	3 to 7 years
Leasehold improvements	Shorter of estimated useful life or lease term

The cost and accumulated depreciation for property and equipment sold, retired or otherwise disposed of are removed from the applicable accounts and resulting gains or losses are recorded in our consolidated statements of income and comprehensive income. Depreciation and amortization on property and equipment totaled $23.0 million, $17.7 million and $20.2 million during fiscal 2017, 2016 and 2015, respectively.

Internal-Use Software

Costs incurred to develop internal-use software during the application development stage are capitalized and reported at cost. Application development stage costs generally include costs associated with internal-use software configuration, coding, installation and testing. Costs of significant upgrades and enhancements that result in additional functionality are also capitalized whereas costs incurred for maintenance and minor upgrades and enhancements are expensed as incurred. Capitalized costs are amortized using the straight-line method over two to three years. Software development costs required to be capitalized for internal-use software have not been material to date.

Capitalized Software and Research and Development Costs

Software development costs relating to products to be sold in the normal course of business are expensed as incurred as research and development costs until technological feasibility is established. Technological feasibility for our products occurs approximately concurrently with the general release of our products; accordingly, we have not capitalized any development or production costs. Costs we incur to maintain and support our existing products after the general release of the product are expensed in the period they are incurred and included in research and development costs in our consolidated statements of income and comprehensive income.

FAIR ISAAC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended September 30, 2017, 2016 and 2015

Goodwill, Acquisition Intangibles and Other Long-Lived Assets

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. Alternatively, we may bypass the qualitative assessment described above for any reporting unit in any period and proceed directly to performing step one of the goodwill impairment test.

For fiscal 2016 and 2015, we performed a step zero qualitative analysis for our annual assessment of goodwill impairment. After evaluating and weighing all relevant events and circumstances, we concluded that it is not more likely than not that the fair value of any of our reporting units was less their carrying amounts. Consequently, we did not perform a step one quantitative analysis. 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.

We amortize our finite-lived intangible assets which result from our acquisitions over the following estimated useful lives:

	Estimated Useful Life
Completed technology	4 to 10 years
Customer contracts and relationships	5 to 15 years
Trade names	3 years

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. We did not recognize any impairment charges on intangible assets that have finite useful lives or other long-lived assets in fiscal 2017, 2016 and 2015.

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 judgment. 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.

FAIR ISAAC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended September 30, 2017, 2016 and 2015

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 material 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 material 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.

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.

FAIR ISAAC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended September 30, 2017, 2016 and 2015

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.

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.

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.

FAIR ISAAC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended September 30, 2017, 2016 and 2015

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.

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.

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 balance sheet 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 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.

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.

Earnings per Share

Basic earnings per share are computed on the basis of the weighted-average number of common shares outstanding during the period under measurement. Diluted earnings per share are based on the weighted-average number of common shares outstanding and potential common shares. Potential common shares result from the assumed exercise of outstanding stock options or other potentially dilutive equity instruments, when they are dilutive under the treasury stock method.

Comprehensive Income

Comprehensive income is the change in our equity (net assets) during each period from transactions and other events and circumstances from non-owner sources. It includes net income, foreign currency translation adjustments and unrealized gains and losses on our investments in marketable securities, net of tax.

FAIR ISAAC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended September 30, 2017, 2016 and 2015

Foreign Currency and Derivative Financial Instruments

We have determined that the functional currency of each foreign operation is the local currency. Assets and liabilities denominated in their local foreign currencies are translated into U.S. dollars at the exchange rate on the balance sheet date. Revenues and expenses are translated at average rates of exchange prevailing during the period. Foreign currency translation adjustments are accumulated as a separate component of consolidated stockholders’ equity.

We utilize derivative instruments to manage market risks associated with fluctuations in certain foreign currency exchange rates as they relate to specific balances of accounts receivable and cash denominated in foreign currencies. We principally utilize foreign currency forward contracts to protect against market risks arising in the normal course of business. Our policies prohibit the use of derivative instruments for the sole purpose of trading for profit on price fluctuations or to enter into contracts that intentionally increase our underlying exposure. All of our foreign currency forward contracts have maturity periods of less than three months.

At the end of the reporting period, foreign-currency-denominated assets and liabilities are remeasured into the functional currencies of the reporting entities at current market rates. The change in value from this remeasurement is reported as a foreign exchange gain or loss for that period in other income (expense), net in the accompanying consolidated statements of income and comprehensive income.

We recorded transactional foreign exchange gains (losses) of $(1.1) million, $0.2 million and $22,000 during fiscal 2017, 2016 and 2015, respectively.

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). See Note 14 for further discussion of our share-based employee benefit plans.

Advertising and Promotion Costs

Advertising and promotion costs are expensed as incurred and are included in selling, general and administrative expenses in the accompanying consolidated statements of income and comprehensive income. Advertising and promotion costs totaled $3.1 million, $3.6 million and $3.7 million in fiscal 2017, 2016 and 2015, respectively.

New Accounting Pronouncements

Recently Adopted Accounting Pronouncements

Effective October 1, 2016, we early adopted ASU No. 2016-09, “Compensation — Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting” (“ASU 2016-09”). ASU 2016-09 simplifies several aspects of the accounting for share-based payment transactions, including income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. As a result of the adoption, we recognized $24.7 million of excess tax benefits related to share-based payments in our provision for income taxes during fiscal 2017. These items were historically recorded as additional paid-in capital. We elected to apply the change retrospectively in presentation to our consolidated statements of cash flows and no longer classify the excess tax benefits from employee stock plans as a reduction from operating cash flows, which resulted in increases to both net cash provided by operating activities and net cash used in financing activities of $25.0 million and $13.8 million for fiscal 2016 and 2015, respectively. Our adoption of ASU 2016-09 also impacted the calculation of diluted weighted-average shares under the treasury stock method as we no longer increase or decrease the assumed proceeds from the vesting of, or an employee exercising, a share-based payment award by the amount of excess tax benefits or deficiencies taken to additional paid-in capital. During fiscal 2017, the impact was immaterial. Given our historical practice of including employee withholding taxes paid within financing activities in the statement of cash flows, no prior period reclassifications are required by the clarifications on classification provided by ASU 2016-09. Furthermore, we elected to continue to estimate expected forfeitures of employee equity awards to determine the amount of compensation expense to be recognized in each period.

FAIR ISAAC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended September 30, 2017, 2016 and 2015

Effective October 1, 2016, we retrospectively adopted ASU No. 2015-03, “Simplifying the Presentation of Debt Issuance” (“ASU 2015-03”). ASU 2015-03 requires an entity to present debt issuance costs related to a recognized debt liability, other than those relating to line-of-credit arrangements, in the balance sheet as a direct deduction from the related debt liability rather than as an asset. As a result of the adoption, at September 30, 2017, the amount of debt issuance costs reflected as a deduction of long-term debt was $0.2 million. At September 30, 2016, the amount of debt issuance costs reclassified from other assets to a deduction of long-term debt was $0.4 million.

Recent Accounting Pronouncements Not Yet Adopted

In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”). ASU 2014-09 requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. ASU 2014-09 will replace most existing revenue recognition guidance in U.S. Generally Accepted Accounting Principles when it becomes effective and permits the use of either the retrospective or cumulative effect transition method. The guidance also requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts. In August 2015, the FASB issued ASU No 2015-14, “Deferral of the Effective Date” (“ASU 2015-14”), which defers the effective date for ASU 2014-09 by one year. For public entities, the guidance in ASU 2014-09 will be effective for annual reporting periods beginning after December 15, 2017 (including interim reporting periods within those periods), which means it will be effective for our fiscal year beginning October 1, 2018. Early adoption is permitted to the original effective date of December 15, 2016 (including interim reporting periods within those periods). In March 2016, the FASB issued ASU No. 2016-08, “Principal versus Agent Considerations (Reporting Revenue versus Net)” (“ASU 2016-08”), which clarifies the implementation guidance on principal versus agent considerations in the new revenue recognition standard. In April 2016, the FASB issued ASU No. 2016-10, “Identifying Performance Obligations and Licensing” (“ASU 2016-10”), which reduces the complexity when applying the guidance for identifying performance obligations and improves the operability and understandability of the license implementation guidance. In May 2016, the FASB issued ASU No. 2016-12 “Narrow-Scope Improvements and Practical Expedients” (“ASU 2016-12”), which amends the guidance on transition, collectability, noncash consideration and the presentation of sales and other similar taxes. In December 2016, the FASB further issued ASU 2016-20, “Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers” (“ASU 2016-20”), which makes minor corrections or minor improvements to the Codification that are not expected to have a significant effect on current accounting practice or create a significant administrative cost to most entities. The amendments are intended to address implementation issues that were raised by stakeholders and provide additional practical expedients to reduce the cost and complexity of applying the new revenue standard. These amendments have the same effective date as the new revenue standard.

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, including 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 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 Top 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.

FAIR ISAAC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended September 30, 2017, 2016 and 2015

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.

2. Business Combinations

There were no acquisitions incurred during fiscal 2017.

In fiscal 2016, we acquired 100% of the equity of QuadMetrics for $5.7 million in cash. We recorded $2.0 million of intangible assets, which are being amortized using the straight-line method over a weighted average useful life of approximately 4.0 years We allocated $3.9 million of goodwill to our Applications segment that was not deductible for tax purposes.

In fiscal 2015, we acquired 100% of the equity of TONBELLER for $59.6 million in cash. We recorded $14.9 million of intangible assets, which are being amortized using the straight-line method over a weighted average useful life of approximately 4.9 years. The goodwill of $46.1 million was allocated to our Applications segment and was not deductible for tax purposes.

3. Cash, Cash Equivalents and Marketable Securities Available for Sale

The following is a summary of cash, cash equivalents and marketable securities available for sale at September 30, 2017 and 2016:

	September 30, 2017												September 30, 2016
	Amortized Cost				Gross Unrealized Gains				Fair Value				Amortized Cost				Gross Unrealized Gains				Fair Value
	(In thousands)
Cash and Cash Equivalents:
Cash	$	90,323			$	—			$	90,323			$	75,486			$	—			$	75,486
Money market funds	6,471				—				6,471				440				—				440
Bank time deposits	8,824				—				8,824				—				—				—
Total	$	105,618			$	—			$	105,618			$	75,926			$	—			$	75,926
Long-term Marketable Securities:
Marketable equity securities	$	10,788			$	3,003			$	13,791			$	9,598			$	1,418			$	11,016

The long-term marketable equity securities represent securities held under a supplemental retirement and savings plan for senior management employees, which are distributed upon termination or retirement of the employees.

FAIR ISAAC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended September 30, 2017, 2016 and 2015

4. 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 September 30, 2017 and 2016.

•

Level 3 — uses one or more significant inputs that are unobservable and supported by little or no market activity, and that reflect the use of significant management judgment. Level 3 assets and liabilities include those whose fair value measurements are determined using pricing models, discounted cash flow methodologies or similar valuation techniques, and significant management judgment or estimation. We do not have any assets or liabilities that are valued using inputs identified under a Level 3 hierarchy as of September 30, 2017 and 2016.

The following table represents financial assets that we measured at fair value on a recurring basis at September 30, 2017 and 2016:

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

September 30, 2016	Active Markets for Identical Instruments (Level 1)				Fair Value as of September 30, 2016
	(In thousands)
Assets:
Cash equivalents (1)	$	440			$	440
Marketable securities (2)	11,016				11,016
Total	$	11,456			$	11,456

(1)	Included in cash and cash equivalents on our balance sheet at September 30, 2017 and 2016. Not included in this table are cash deposits of $90.3 million and $75.5 million at September 30, 2017 and 2016, respectively.

(2)	Represents securities held under a supplemental retirement and savings plan for certain officers and senior management employees, which are distributed upon termination or retirement of the employees. Included in long-term marketable securities on our balance sheet at September 30, 2017 and 2016.

Where applicable, we use quoted prices in active markets for identical assets or liabilities to determine fair value. This pricing applies to our Level 1 investments. To the extent quoted prices in active markets for assets or liabilities are not available, the valuation techniques used to measure the fair values of our financial assets incorporate market inputs, which include reported trades, broker/dealer quotes, benchmark yields, issuer spreads, benchmark securities and other inputs derived from or corroborated by observable market data. This methodology would apply to our Level 2 investments. We have not changed our valuation techniques in measuring the fair value of any financial assets and liabilities during the period.

FAIR ISAAC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended September 30, 2017, 2016 and 2015

For the fair value of our derivative instruments and senior notes, see Note 5 and Note 10, respectively.

5. 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 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 September 30, 2017 and 2016:

	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			—

	September 30, 2016
	Contract Amount								Fair Value
	Foreign Currency				US$				US$
		(In thousands)
Sell foreign currency:
Euro (EUR)	EUR	7,850			$	8,743			—
Buy foreign currency:
British pound (GBP)	GBP	7,721			$	10,000			—

The foreign currency forward contracts were entered into on September 30 of each fiscal year; therefore, their fair value was $0 at September 30, 2017 and 2016.

Gains (losses) on derivative financial instruments are recorded in our consolidated statements of income and comprehensive income as a component of other income (expense), net. These amounts are shown below for the years ended September 30, 2017, 2016 and 2015:

	Year Ended September 30,
	2017				2016				2015
	(In thousands)
Gain (loss) on foreign currency forward contracts	$	210			$	(2,911	)		$	(62	)

FAIR ISAAC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended September 30, 2017, 2016 and 2015

6. Receivables

Receivables at September 30, 2017 and 2016 consisted of the following:

	September 30,
	2017				2016
	(In thousands)
Billed	$	126,887			$	124,731
Unbilled (1)	44,640				45,247
	171,527				169,978
Less: allowance for doubtful accounts	(2,941		)		(2,192		)
Receivables, net	$	168,586			$	167,786

(1)	Represents revenue recorded in excess of amounts billable pursuant to contract provisions and generally become billable at contractually specified dates or upon the attainment of milestones. Unbilled amounts are expected to be realized within one year.

Activity in the allowance for doubtful accounts was as follows:

	Year Ended September 30,
	2017				2016
	(In thousands)
Balance, beginning of year	$	2,192			$	2,126
Add: expense	1,640				2,011
Less: write-offs (net of recoveries)	(891		)		(1,945		)
Balance, end of year	$	2,941			$	2,192

7. Goodwill and Intangible Assets

Intangible assets that are subject to amortization consisted of the following at September 30, 2017 and 2016:

	September 30, 2017														September 30, 2016
	(In thousands, except average life)
	Gross Carrying Amount				Accumulated Amortization				Net				Average Life		Gross Carrying Amount				Accumulated Amortization				Net				Average Life
Completed technology	$	84,955			$	(77,682	)		$	7,273			5		$	84,184			$	(70,368	)		$	13,816			5
Customer contracts and relationships	28,947				(15,091		)		13,856				8		64,592				(45,034		)		19,558				12
Trade names	603				(547		)		56				3		575				(330		)		245				3
	$	114,505			$	(93,320	)		$	21,185			6		$	149,351			$	(115,732	)		$	33,619			8

Amortization expense associated with our intangible assets, which has been reflected as a separate operating expense caption within the accompanying consolidated statements of income and comprehensive income, consisted of the following during fiscal 2017, 2016 and 2015:

	Year Ended September 30,
	2017				2016				2015
	(In thousands)
Cost of revenues	$	6,511			$	7,300			$	7,594
Selling, general and administrative expenses	6,198				6,682				6,079
Total	$	12,709			$	13,982			$	13,673

In the table above, cost of revenues reflects our amortization of completed technology, and selling, general and administrative expenses reflect our amortization of other intangible assets.

FAIR ISAAC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended September 30, 2017, 2016 and 2015

Estimated future intangible asset amortization expense associated with intangible assets existing at September 30, 2017, was as follows (in thousands):

Year Ended September 30,
2018	$	6,555
2019	6,037
2020	3,670
2021	2,426
2022	2,280
Thereafter	217
Total	$	21,185

The following table summarizes changes to goodwill during fiscal 2017 and 2016, both in total and as allocated to our operating segments. We have not recognized any goodwill impairment losses to date.

	Applications				Scores				Decision Management Software				Total
	(In thousands)
Balance at September 30, 2015	$	596,765			$	146,648			$	71,337			$	814,750
Addition from acquisitions	3,857				—				—				3,857
Adjustment related to prior acquisitions	283				—				—				283
Foreign currency translation adjustment	(18,185		)		—				(2,290		)		(20,475		)
Balance at September 30, 2016	582,720				146,648				69,047				798,415
Foreign currency translation adjustment	5,568				—				431				5,999
Balance at September 30, 2017	$	588,288			$	146,648			$	69,478			$	804,414

8. Composition of Certain Financial Statement Captions

The following table presents the composition of property and equipment at September 30, 2017 and 2016:

	September 30,
	2017				2016
	(In thousands)
Property and equipment:
Data processing equipment and software	$	88,830			$	84,761
Office furniture and equipment	20,763				16,847
Leasehold improvements	25,767				25,152
Less: accumulated depreciation and amortization	(94,657		)		(81,638		)
Total	$	40,703			$	45,122

FAIR ISAAC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended September 30, 2017, 2016 and 2015

9. Revolving Line of Credit

In June 2017, we amended our credit agreement with a syndicate of banks, increasing our borrowing capacity under the unsecured revolving line of credit to $500 million with an option to increase it by another $100 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 and (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 September 30, 2017, we had $361.0 million in borrowings outstanding at a weighted average interest rate of 2.365%, of which $350.0 million was classified as a long-term liability and recorded in long-term debt within the accompanying consolidated balance sheets. We were in compliance with all financial covenants under this credit facility as of September 30, 2017.

10. 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 as follows:

Series	Amount			Interest Rate		Maturity Date
	(In millions)
A	$	41.0		6.37	%	May 7, 2013
B	$	40.0		6.37	%	May 7, 2015
C	$	63.0		6.71	%	May 7, 2015
D	$	131.0		7.18	%	May 7, 2018

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 as follows:

Series	Amount			Interest Rate		Maturity Date
	(In millions)
E	$	60.0		4.72	%	July 14, 2016
F	$	72.0		5.04	%	July 14, 2017
G	$	28.0		5.42	%	July 14, 2019
H	$	85.0		5.59	%	July 14, 2020

We were and are required to pay the entire unpaid principal balances of each note series on its maturity date except for Series B notes, which required annual principal payments of $8.0 million starting on May 7, 2011 and ending on May 7, 2015. 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 September 30, 2017, we were in compliance with all financial covenants.

The following table presents the carrying amounts and fair values for the Senior Notes at September 30, 2017 and 2016:

FAIR ISAAC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended September 30, 2017, 2016 and 2015

	September 30, 2017								September 30, 2016
	Carrying Amounts				Fair Value				Carrying Amounts (1)				Fair Value (1)
	(In thousands)
The 2008 Senior Notes	$	131,000			$	134,250			$	131,000			$	139,902
The 2010 Senior Notes	113,000				119,106				185,000				195,715
Debt issuance costs	(199		)		(199		)		(376		)		(376		)
Total	$	243,801			$	253,157			$	315,624			$	335,241

(1) Balances as of September 30, 2016 have been recast as a result of the adoption of ASU 2015-03 to present debt issuance costs of $0.4 million as a direct deduction from the carrying amount of the Senior Notes.

We measure the fair value of the Senior Notes based on Level 2 inputs, which include quoted market prices and interest rate spreads of similar securities.

Future principal payments for the Senior Notes are as follows (in thousands):

Year Ended September 30,
2018	$	131,000
2019	28,000
2020	85,000
Total	$	244,000

11. Employee Benefit Plans

Defined Contribution Plans

We sponsor the Fair Isaac Corporation 401(k) plan for eligible employees in the U.S. Under this plan, eligible employees may contribute up to 25% of compensation, not to exceed statutory limits. We also provide a company matching contribution. Investment in FICO common stock is not an option under this plan. Our contributions into all 401(k) plans, including former acquired company sponsored plans that have since merged into the Fair Isaac Corporation 401(k) plan or have been frozen, totaled $8.4 million, $7.3 million and $7.1 million during fiscal 2017, 2016 and 2015, respectively.

Employee Incentive Plans

We maintain various employee incentive plans for the benefit of eligible employees, including officers. The awards generally are based on the achievement of certain financial and performance objectives subject to the discretion of management. Total expenses under our employee incentive plans were $41.6 million, $40.0 million and $20.3 million during fiscal 2017, 2016 and 2015, respectively.

12. Restructuring Expenses

During fiscal 2017, we incurred net charges totaling $4.5 million consisting of $1.7 million in facilities charges associated with vacating excess leased space in San Rafael, California and $2.8 million in severance charges due to the elimination of 79 positions throughout the Company. Cash payments for all the facilities charges will be paid by the end of fiscal 2020. Cash payments for all the employee separation costs will be paid by the end of the second quarter of fiscal 2018.

There was no restructuring expense incurred during fiscal 2016.

During fiscal 2015, we incurred net charges totaling $17.5 million consisting of $13.6 million in facilities charges associated with vacating excess leased space in Roseville, Minnesota and San Rafael, California, and $3.9 million in severance charges due to the elimination of 97 positions throughout the Company. Cash payments for all the facilities charges will be paid by the end of fiscal 2020. Cash payments for all the severance costs were paid by the end of fiscal 2016.

The following tables summarize our restructuring accruals associated with the above actions. The current portion and non-current portion was recorded in other accrued liabilities and other liabilities, respectively, within the accompanying consolidated balance sheets.

FAIR ISAAC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended September 30, 2017, 2016 and 2015

	Accrual at September 30, 2015				Expense Additions				Cash Payments				Accrual at September 30, 2016
	(In thousands)
Facilities charges	$	12,995			$	—			$	(3,762	)		$	9,233
Employee separation	2,405				—				(2,405		)		—
	15,400				$	—			$	(6,167	)		9,233
Less: current portion	(5,570		)										(4,266		)
Non-current	$	9,830											$	4,967

	Accrual at September 30, 2016				Expense Additions				Cash Payments				Accrual at September 30, 2017
	(In thousands)
Facilities charges	$	9,233			$	1,729			$	(2,842	)		$	8,120
Employee separation	—				2,742				(2,557		)		185
	9,233				$	4,471			$	(5,399	)		8,305
Less: current portion	(4,266		)										(3,077		)
Non-current	$	4,967											$	5,228

13. Income Taxes

The provision for income taxes was as follows during fiscal 2017, 2016 and 2015:

	Year ended September 30,
	2017				2016				2015
	(In thousands)
Current:
Federal	$	19,576			$	50,631			$	23,646
State	1,055				2,900				(5,381		)
Foreign	8,486				7,597				10,405
	29,117				61,128				28,670
Deferred:
Federal	(5,027		)		(23,592		)		(5,004		)
State	(296		)		(225		)		1,422
Foreign	(726		)		(2,190		)		(2,352		)
	(6,049		)		(26,007		)		(5,934		)
Total provision	$	23,068			$	35,121			$	22,736

The foreign provision was based on foreign pre-tax earnings of $27.8 million, $33.0 million and $45.2 million in fiscal 2017, 2016 and 2015, respectively. Current foreign tax expense related to foreign tax withholdings was $4.6 million, $6.5 million and $5.3 million in fiscal 2017, 2016 and 2015, respectively. Foreign withholding tax and related foreign tax credits are included in current tax expense above.

FAIR ISAAC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended September 30, 2017, 2016 and 2015

Deferred tax assets and liabilities at September 30, 2017 and 2016 were as follows:

	September 30,
	2017				2016
	(In thousands)
Deferred tax assets:
Net operating loss carryforward	$	16,765			$	16,122
Foreign tax credit carryforward	10,286				14,590
Research credit carryforward	7,333				6,132
Accrued bonus	14,468				13,807
Investments	582				619
Accrued compensation	1,585				1,328
Share-based compensation	29,770				27,203
Deferred revenue	—				1,467
Accrued lease costs	3,026				3,406
Property and equipment	3,476				3,348
Other	8,630				7,728
	95,921				95,750
Less valuation allowance	(17,657		)		(15,145		)
Total deferred tax assets	78,264				80,605
Deferred tax liabilities:
Intangible assets	(25,346		)		(28,056		)
Prepaid expense	(4,681		)		(3,959		)
Deferred revenue	(41		)		—
Other	(992		)		(992		)
Total deferred tax liabilities	(31,060		)		(33,007		)
Deferred tax assets, net	$	47,204			$	47,598

Based upon the level of historical taxable income and projections for future taxable income over the periods that the deferred tax assets will reverse, management believes it is more likely than not that we will realize the benefits of the deferred tax assets, net of the existing valuation allowance at September 30, 2017.

As of September 30, 2017, we had available U.S. federal, state and foreign net operating loss (“NOL”) carryforwards of approximately $17.1 million, $0.3 million, and $38.8 million, respectively. The U.S. NOLs were acquired in connection with our acquisitions of Braun in fiscal 2005, Adeptra in fiscal 2012, Infoglide in fiscal 2013 and Quadmetrics in 2016. The U.S. federal NOL carryforward will expire at various dates beginning in fiscal 2020, if not utilized. The state NOL carryforward will begin to expire at various dates beginning in fiscal 2021, if not utilized. The $38.8 million of foreign NOL includes $24.2 million related to China. Due to a limited ability to utilize the China NOLs a full valuation allowance has been recorded on the China NOLs, resulting in no tax benefit. Utilization of the U.S. federal and state NOL are subject to an annual limitation due to the “change in ownership” provisions of the Internal Revenue Code of 1986, as amended, and similar state provisions. In fiscal 2016 and 2017 we generated excess foreign tax credits associated with dividends received from two of our foreign subsidiaries. The associated deferred tax asset of $9.6 million can be carried forward for up to 10 years. Management believes it is more likely than not that we will realize the benefit of this deferred tax asset and therefore no valuation allowance has been recorded to offset the future benefit of these credits. We also have available excess California state research credit of approximately $7.3 million. The California state research credit does not have an expiration date; however, based on enacted law and expected future cash taxes, we have recorded a valuation allowance of $7.3 million.

FAIR ISAAC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended September 30, 2017, 2016 and 2015

A reconciliation of the provision for income taxes, with the amount computed by applying the U.S. federal statutory income tax rate (35% in fiscal 2017, 2016 and 2015) to income before provision for income taxes for fiscal 2017, 2016 and 2015 is shown below:

	Year Ended September 30,
	2017				2016				2015
	(In thousands)
Income tax provision at U.S. federal statutory rate	$	52,963			$	50,599			$	38,233
State income taxes, net of U.S. federal benefit	2,193				2,244				1,719
Foreign tax rate differential	(1,761		)		(4,661		)		(5,279		)
Intercompany interest	(477		)		(1,223		)		(1,260		)
Research credits	(2,572		)		(4,398		)		(2,104		)
Domestic production deduction	(3,075		)		(3,726		)		(1,607		)
Amended Returns/Audit Settlements/Statute Expirations	(1,296		)		(248		)		(5,806		)
Foreign	744				(1,702		)		(3,109		)
Valuation allowance	2,512				1,262				1,805
Foreign tax credit	(1,342		)		(3,286		)		(1,296		)
Excess tax benefits relating to stock-based compensation	(24,746		)		—				—
Other	(75		)		260				1,440
Recorded income tax provision	$	23,068			$	35,121			$	22,736

The decrease in our income tax provision in fiscal 2017 compared to fiscal 2016 was due primarily to the adoption of ASU 2016-09 on October 1, 2016. We no longer record excess tax benefits as an increase to additional paid-in capital, but record such excess tax benefits on a prospective basis as a reduction of income tax expense.

The increase in our income tax provision in fiscal 2016 compared to fiscal 2015 was due primarily to the favorable settlement of the fiscal 2006-2009 state audits and the favorable settlement of the 2010 foreign transfer pricing assessment in fiscal 2015, partially offset by an increase in the foreign tax credit associated with the repatriation of income from the United Kingdom and Brazil and the Domestic Production Activities Deduction in fiscal 2016.

As of September 30, 2017, we have not made a provision for U.S. or additional foreign withholding taxes on approximately $47.0 million of the excess of the amount for financial reporting over the tax basis of investments in foreign subsidiaries. We intend to reinvest the earnings of non-U.S. subsidiaries in those operations indefinitely, except where we are able to repatriate these earnings to the United States without material incremental tax provision. The determination and estimation of the future income tax consequences in all relevant taxing jurisdictions involves the application of highly complex tax laws in the countries involved, particularly in the United States, and is based on our tax profile in the year of earnings repatriation. Accordingly, it is not practicable to estimate the amount of deferred tax liability related to investments in these foreign subsidiaries.

Unrecognized Tax Benefit for Uncertain Tax Positions

We conduct business globally and, as a result, file income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions. In the normal course of business, we are subject to examination by taxing authorities. With a few exceptions, we are no longer subject to U.S. federal, state, local, or foreign income tax examinations for fiscal years prior to 2014. We are currently under audit by New York City for fiscal 2011, 2012 and 2013. We do not anticipate any adjustments related to those audits that will result in a material change to our consolidated financial statements.

FAIR ISAAC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended September 30, 2017, 2016 and 2015

A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows:

	Year Ended September 30,
	2017				2016				2015
	(In thousands)
Gross unrecognized tax benefits at beginning of year	$	6,799			$	4,634			$	4,554
Gross increases for tax positions in prior years	57				1,004				1,725
Gross decreases for tax positions in prior years	(19		)		(117		)		(3		)
Gross increases based on tax positions related to the current year	1,291				1,310				582
Decreases for settlements and payments	(151		)		(32		)		(2,224		)
Decreases due to statue expiration	(1,497		)		—				—
Gross unrecognized tax benefits at end of year	$	6,480			$	6,799			$	4,634

We had $6.5 million of total unrecognized tax benefits as of September 30, 2017, including $5.8 million of tax benefits that, if recognized, would impact the effective tax rate. Although the timing and outcome of audit settlements are uncertain, it is unlikely there will be a reduction of the uncertain tax benefits in the next 12 months.

We recognize interest expense related to unrecognized tax benefits and penalties as part of the provision for income taxes in our consolidated statements of income and comprehensive income. We recognize interest earned related to income tax matters as interest income in our consolidated statements of income and comprehensive income. As of September 30, 2017, we have accrued interest of $0.4 million related to the unrecognized tax benefits.

14. Stock-Based Employee Benefit Plans

Description of Stock Option and Share Plans

We maintain the 2012 Long-Term Incentive Plan (the “2012 Plan”) under which we are authorized to issue 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 one other long-term incentive plan under which awards are currently outstanding: 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. Stock option awards and restricted stock unit awards not subject to market conditions vest ratably over three or four years. Restricted stock unit awards subject to market conditions vest annually over a period of three years based on the achievement of specified criteria. At September 30, 2017, there were 4,018,329 shares available for issuance under the 2012 Plan.

Description of Employee Stock Purchase Plan

Under our Employee Stock Purchase Plan (the “Purchase Plan”), we are authorized to issue up to 5,062,500 shares of common stock to eligible employees. Employees may have up to 10% of their base salary withheld through payroll deductions to purchase FICO common stock during semi-annual offering periods. The purchase price of the stock is 85% of the fair market value on the exercise date (the last day of each offering period). Offering period means approximately six-month periods commencing (a) on the first trading day on or after January 1 and terminating on the last trading day in the following June, and (b) on the first trading day on or after July 1 and terminating on the last trading day in the following December. The Purchase Plan was suspended effective January 1, 2009 and employees cannot contribute to the Purchase Plan until the suspension is repealed. At September 30, 2017, there were 2,707,966 shares available for issuance.

We satisfy stock option exercises, vesting of restricted stock units and the Purchase Plan issuances from treasury shares.

Share-Based Compensation Expense and Related Income Tax Benefits

We recorded share-based compensation expense of $61.2 million, $55.5 million and $45.3 million in fiscal years 2017, 2016 and 2015, respectively. The total tax benefit related to this share-based compensation expense was $20.4 million, $18.7 million and $16.1 million in fiscal 2017, 2016 and 2015, respectively. As of September 30, 2017, there was $87.6 million of total unrecognized compensation cost related to non-vested share-based compensation arrangements granted under all equity compensation plans. Total unrecognized compensation cost will be adjusted for future changes in estimated forfeitures. We expect to recognize that cost over a weighted average period of 2.34 years.

FAIR ISAAC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended September 30, 2017, 2016 and 2015

In fiscal 2017 we received $14.5 million in cash from stock option exercises, with the tax benefit realized for the tax deductions from these exercises of $9.4 million.

Stock-Based Activity

Stock Options

We estimate the fair value of stock options granted using the Black-Scholes option valuation model and we amortize the fair value on a straight-line basis over the vesting period. We used the following assumptions to estimate the fair value of our stock options during fiscal 2017, 2016 and 2015:

	Year Ended September 30,
	2017			2016			2015
Stock Options:
Average expected term (years)	5.00			4.83			4.18
Expected volatility (range)	35.3	%		35.3 - 36.4	%		34.5 - 35.3	%
Weighted average volatility	35.3	%		36.0	%		34.6	%
Risk-free interest rate (range)	2.02	%		1.21 - 1.49	%		1.33 - 1.48	%
Average expected dividend yield	0.07	%		0.09	%		0.14	%
Expected dividend yield (range)	0.07	%		0.09 - 0.10	%		0.11 - 0.14	%

Expected Volatility. We estimate the volatility of our common stock at the date of grant based on a combination of the implied volatility of publicly traded options on our common stock and our historical volatility rate.

Expected Term. The expected term represents the period that our stock options are expected to be outstanding. We estimate the expected term based on historical experience of similar awards, giving consideration to the contractual terms of the stock-based awards, vesting schedules and expectations of future employee behavior.

Dividends. The dividend yield assumption is based on historical dividend payouts.

Risk-Free Interest Rate. The risk-free interest rate assumption is based on observed interest rates appropriate for the term of our employee options.

Forfeitures. We use historical data to estimate pre-vesting option forfeitures and record share-based compensation expense only for those awards that are expected to vest.

The following table summarizes option activity during fiscal 2017:

	Shares			Weighted- average Exercise Price				Weighted- average Remaining Contractual Term		Aggregate Intrinsic Value
	(In thousands)							(In years)		(In thousands)
Outstanding at October 1, 2016	1,521			$	52.37
Granted	34			128.80
Exercised	(325	)		44.52
Outstanding at September 30, 2017	1,230			$	56.54			3.12		$	103,275
Exercisable at September 30, 2017	946			$	50.29			2.74		$	85,354
Vested and expected to vest at September 30, 2017	1,223			$	56.43			3.11		$	102,843

FAIR ISAAC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended September 30, 2017, 2016 and 2015

The weighted average fair value of options granted were $43.80, $31.06 and $21.66 during fiscal 2017, 2016 and 2015, respectively. The aggregate intrinsic value of options outstanding at September 30, 2017 was calculated as the difference between the exercise price of the underlying options and the market price of our common stock for the 1.2 million outstanding shares, which had exercise prices lower than the $140.50 market price of our common stock at September 30, 2017. The total intrinsic value of options exercised was $27.0 million, $41.3 million and $24.3 million during fiscal 2017, 2016 and 2015, respectively, determined as of the date of exercise.

Restricted Stock Units

The fair value of restricted stock units (“RSUs”) granted is the closing market price of our common stock on the date of grant, adjusted for the expected dividend yield, if applicable. We amortize the fair value on a straight-line basis over the vesting period.

The following table summarizes the RSUs activity during fiscal 2017:

	Shares			Weighted-average Grant-date Fair Value
	(In thousands)
Outstanding at October 1, 2016	1,211			$	76.93
Granted	460			122.47
Released	(475	)		68.54
Forfeited	(52	)		93.80
Outstanding at September 30, 2017	1,144			$	97.95

The weighted average fair value of the RSUs granted were $122.47, $94.77 and $73.93 during fiscal 2017, 2016 and 2015, respectively. The total intrinsic value of the RSUs that vested was $58.7 million, $49.8 million and $38.5 million during fiscal 2017, 2016 and 2015, respectively, determined as of the date of vesting.

Performance Share Units

Performance share units (“PSUs”) are granted to our senior officers and earned based on pre-established performance goals approved by the Leadership Development and Compensation Committee of our Board of Directors for any given performance period. The range of payout is zero to 200% of the number of granted PSUs, based on the outcome of the performance conditions. We estimate the fair value of the PSUs using the closing market price of our common stock on the date of grant, adjusted for the expected dividend yield if applicable, based on the performance condition that is probable of achievement. We amortize the fair values over the requisite service period for each vesting tranche of the award. We reassess the probability at each reporting period and recognize the cumulative effect of the change in estimate in the period of change.

The following table summarizes the PSUs activity during fiscal 2017:

	Shares			Weighted- average Grant-date Fair Value
	(In thousands)
Outstanding at October 1, 2016	230			$	73.99
Granted	110			121.30
Released	(136	)		65.24
Outstanding at September 30, 2017	204			$	105.37

The weighted average fair value of the PSUs granted were $121.30, $91.74 and $71.86 during fiscal 2017, 2016 and 2015, respectively. The total intrinsic value of the PSUs that vested was $16.6 million, $14.0 million and $9.7 million during fiscal 2017, 2016 and 2015, respectively, determined as of the date of vesting.

FAIR ISAAC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended September 30, 2017, 2016 and 2015

Market Share Units

Market share units (“MSUs”) are granted to our senior officers and earned based on our total shareholder return relative to the Russell 3000 Index over performance periods of one, two and three years. We estimate the fair value of MSUs granted using the Monte Carlo valuation model and amortize the fair values over the requisite service period for each vesting tranche of the award. In addition, we do not reverse the compensation cost solely because the market condition is not satisfied, and the award is therefore not earned by the employee, provided the requisite service is rendered. We used the following assumptions to estimate the fair value of our MSUs during fiscal 2017, 2016 and 2015:

	Year Ended September 30,
	2017			2016			2015
Expected volatility in FICO’s stock price	27.4	%		24.1	%		26.6	%
Expected volatility in Russell 3000 Index	13.6	%		12.8	%		12.2	%
Correlation between FICO and the Russell 3000 Index	59.8	%		60.2	%		55.9	%
Risk-free interest rate	1.40	%		1.25	%		1.10	%
Average expected dividend yield	0.07	%		0.09	%		0.14	%

The expected volatility was determined based on daily historical movements in our stock price and the Russell 3000 Index for the three years preceding the grant date. The correlation between FICO and the Russell 3000 Index was determined based on historical daily stock price movements for the three years preceding the grant date. The dividend yield was determined using the historical dividend payout and a trailing twelve month closing stock price on the grant date. The risk-free rate was determined based on U.S. Treasury zero-coupon yields over the three-year performance period.

The following table summarizes the MSUs activity during fiscal 2017:

	Shares			Weighted- average Grant-date Fair Value
	(In thousands)
Outstanding at October 1, 2016	142			$	100.40
Granted	155			108.09
Released	(166	)		89.09
Outstanding at September 30, 2017	131			$	123.82

The weighted average fair value of the MSUs granted were $108.09, $100.63 and $101.85 during fiscal 2017, 2016 and 2015, respectively. The total intrinsic value of the MSUs that vested was $20.2 million, $9.2 million and $1.7 million during fiscal 2017, 2016 and 2015, respectively, determined as of the date of vesting.

FAIR ISAAC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended September 30, 2017, 2016 and 2015

15. Earnings per Share

The following table presents reconciliations for the numerators and denominators of basic and diluted earnings per share (“EPS”) during fiscal 2017, 2016 and 2015:

	Year Ended September 30,
	2017				2016				2015
	(In thousands, except per share data)
Numerator for basic and diluted earnings per share — net income	$	128,256			$	109,448			$	86,502
Denominator — share:
Basic weighted-average shares	30,862				31,129				31,402
Effect of dilutive securities	1,383				1,179				1,207
Diluted weighted-average shares	32,245				32,308				32,609
Earnings per share:
Basic	$	4.16			$	3.52			$	2.75
Diluted	$	3.98			$	3.39			$	2.65

The computation of diluted EPS excludes options to purchase approximately 8,000, 9,000, and 138,000 shares of common stock for fiscal 2017, 2016 and 2015, respectively, because the exercise prices of the options exceeded the average market price of our common stock in these fiscal years and their inclusion would be antidilutive.

16. Related Party Transactions

We have a $10 million investment in convertible preferred stock of a private company. The company is developing a range of products focused on revenue cycle activities for hospitals and healthcare providers. Related party revenue was immaterial for the years ended September 30, 2017, 2016 and 2015. The accounts receivable balance from this company was not significant as of September 30, 2017 and 2016.

17. 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.

FAIR ISAAC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended September 30, 2017, 2016 and 2015

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 and acquisition-related expense, amortization expense, various corporate charges and certain other income and expense measures to our segments. These income and expense items are not allocated because they are not considered in evaluating the segment’s operating performance. Our Chief Executive Officer does not evaluate the financial performance of each segment based on its respective assets or capital expenditures; rather, depreciation amounts are allocated to the segments from their internal cost centers as described above.

The following tables summarize segment information for fiscal 2017, 2016 and 2015:

	Year Ended September 30, 2017
	Applications				Scores				Decision Management Software				Unallocated Corporate Expenses				Total
	(In thousands)
Segment revenues:
Transactional and maintenance	$	348,861			$	259,780			$	44,019			$	—			$	652,660
Professional services	141,857				2,849				34,863				—				179,569
License	62,449				3,725				33,766				—				99,940
Total segment revenues	553,167				266,354				112,648				—				932,169
Segment operating expense	(393,667		)		(54,436		)		(123,466		)		(104,998		)		(676,567		)
Segment operating income (loss)	$	159,500			$	211,918			$	(10,818	)		$	(104,998	)		$	255,602
Unallocated share-based compensation expense																	(61,222		)
Unallocated amortization expense																	(12,709		)
Unallocated restructuring and acquisition-related expenses																	(4,471		)
Operating income																	177,200
Unallocated interest expense, net																	(25,790		)
Unallocated other expense, net																	(86		)
Income before income taxes																	$	151,324
Depreciation expense	$	15,857			$	991			$	4,783			$	1,349			$	22,980

FAIR ISAAC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended September 30, 2017, 2016 and 2015

	Year Ended September 30, 2016
	Applications				Scores				Decision Management Software				Unallocated Corporate Expenses				Total
	(In thousands)
Segment revenues:
Transactional and maintenance	$	328,472			$	233,655			$	43,792			$	—			$	605,919
Professional services	138,775				4,185				26,778				—				169,738
License	65,395				3,219				37,085				—				105,699
Total segment revenues	532,642				241,059				107,655				—				881,356
Segment operating expense	(364,371		)		(55,975		)		(111,315		)		(110,612		)		(642,273		)
Segment operating income (loss)	$	168,271			$	185,084			$	(3,660	)		$	(110,612	)		239,083
Unallocated share-based compensation expense																	(55,509		)
Unallocated amortization expense																	(13,982		)
Operating income																	169,592
Unallocated interest expense, net																	(26,633		)
Unallocated other income, net																	1,610
Income before income taxes																	$	144,569
Depreciation expense	$	11,852			$	814			$	3,657			$	1,328			$	17,651

	Year Ended September 30, 2015
	Applications				Scores				Decision Management Software				Unallocated Corporate Expenses				Total
	(In thousands)
Segment revenues:
Transactional and maintenance	$	320,596			$	200,426			$	43,210			$	—			$	564,232
Professional services	124,562				2,901				24,310				—				151,773
License	81,116				3,680				37,980				—				122,776
Total segment revenues	526,274				207,007				105,500				—				838,781
Segment operating expense	(366,666		)		(55,793		)		(111,850		)		(89,744		)		(624,053		)
Segment operating income (loss)	$	159,608			$	151,214			$	(6,350	)		$	(89,744	)		214,728
Unallocated share-based compensation expense																	(45,308		)
Unallocated amortization expense																	(13,673		)
Unallocated restructuring and acquisition-related expenses																	(18,242		)
Operating income																	137,505
Unallocated interest expense, net																	(29,150		)
Unallocated other income, net																	883
Income before income taxes																	$	109,238
Depreciation expense	$	13,861			$	921			$	3,087			$	2,347			$	20,216

Our revenues and percentage of revenues by reportable market segments were as follows for fiscal 2017, 2016 and 2015, the majority of which were derived from the sale of products and services within the banking (including consumer credit) industry:

FAIR ISAAC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended September 30, 2017, 2016 and 2015

	Year Ended September 30,
	2017							2016							2015
	(Dollars in thousands)
Applications	$	553,167			59	%		$	532,642			61	%		$	526,274			63	%
Scores	266,354				29	%		241,059				27	%		207,007				25	%
Decision Management Software	112,648				12	%		107,655				12	%		105,500				12	%
Total	$	932,169			100	%		$	881,356			100	%		$	838,781			100	%

Within our Applications segment our fraud solutions accounted for 19%, 20% and 23% of total revenues in each of fiscal 2017, 2016 and 2015, respectively, our customer communication services accounted for 10%, 9% and 8% of total revenues in each of these periods, respectively; and our customer management solutions accounted for 8%, 9% and 9% of total revenues in each of these periods, respectively.

Our revenues and percentage of revenues on a geographical basis are summarized below for fiscal 2017, 2016 and 2015:

	Year Ended September 30,
	2017							2016							2015
	(Dollars in thousands)
United States	$	598,765			64	%		$	567,443			64	%		$	505,109			60	%
United Kingdom	71,989				8	%		86,485				10	%		93,855				11	%
Other countries	261,415				28	%		227,428				26	%		239,817				29	%
Total	$	932,169			100	%		$	881,356			100	%		$	838,781			100	%

During fiscal 2017, 2016 and 2015, no individual customer accounted for 10% or more of our total revenues; however, we derive a substantial portion of revenues from our contracts with the three major credit reporting agencies, Experian, TransUnion and Equifax. Revenues collectively generated by agreements with these customers accounted for 20%, 19% and 16% of our total revenues in fiscal 2017, 2016 and 2015, respectively. At September 30, 2017 and 2016, no individual customer accounted for 10% or more of total consolidated receivables.

Our property and equipment, net, on a geographical basis are summarized below at September 30, 2017 and 2016:

	September 30,
	2017							2016
	(Dollars in thousands)
United States	$	30,773			76	%		$	36,083			80	%
United Kingdom	4,893				12	%		3,769				8	%
Other countries	5,037				12	%		5,270				12	%
Total	$	40,703			100	%		$	45,122			100	%

FAIR ISAAC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended September 30, 2017, 2016 and 2015

18. Commitments

Minimum future commitments under non-cancelable operating leases and other obligations were as follows at September 30, 2017:

Year Ended September 30,	Future Minimum Lease Commitments
	(In thousands)
2018	$	23,787
2019	22,042
2020	13,414
2021	9,619
2022	9,104
Thereafter	22,790
Total	$	100,756

Lease Commitments

The above amounts have contractual sublease commitments totaling $0.3 million for fiscal 2018 and fiscal 2019. We occupy the majority of our facilities under non-cancelable operating leases with lease terms in excess of one year. Such facility leases generally provide for annual increases based upon the Consumer Price Index or fixed increments. Rent expense under operating leases, including month-to-month leases, totaled $18.6 million, $17.6 million and $20.7 million during fiscal 2017, 2016 and 2015, respectively.

Other Commitments

In the ordinary course of business, we enter into contractual purchase obligations and other agreements that are legally binding and specify certain minimum payment terms.

We are also a party to a management agreement with 23 of our executives providing for certain payments and other benefits in the event of a qualified change in control of FICO, coupled with a termination of the officer during the following year.

19. 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.

20. Guarantees

In the ordinary course of business, we are not subject to potential obligations under guarantees, except for standard indemnification and warranty provisions that are contained within many of our customer license and service agreements and certain supplier agreements, including underwriter agreements, as well as standard indemnification agreements that we have executed with certain of our officers and directors, and give rise only to the disclosure in the consolidated financial statements. In addition, we continue to monitor the conditions that are subject to the guarantees and indemnifications to identify whether it is probable that a loss has occurred, and would recognize any such losses under the guarantees and indemnifications when those losses are estimable.

FAIR ISAAC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended September 30, 2017, 2016 and 2015

Indemnification and warranty provisions contained within our customer license and service agreements and certain supplier agreements are generally consistent with those prevalent in our industry. The duration of our product warranties generally does not exceed 90 days following delivery of our products. We have not incurred significant obligations under customer indemnification or warranty provisions historically and do not expect to incur significant obligations in the future. Accordingly, we do not maintain accruals for potential customer indemnification or warranty-related obligations. The indemnification agreements that we have executed with certain of our officers and directors would require us to indemnify such officers and directors in certain instances. We have not incurred obligations under these indemnification agreements historically and do not expect to incur significant obligations in the future. Accordingly, we do not maintain accruals for potential officer or director indemnification obligations. The maximum potential amount of future payments that we could be required to make under the indemnification provisions in our customer license and service agreements, and officer and director agreements is unlimited.

21. Supplementary Financial Data (Unaudited)

The following table presents selected unaudited consolidated financial results for each of the eight quarters in the two-year period ended September 30, 2017. In the opinion of management, this unaudited information has been prepared on the same basis as the audited information and includes all adjustments (consisting of only normal recurring adjustments, except as noted below) necessary for a fair statement of the consolidated financial information for the period presented.

	Quarter Ended
	September 30, 2017				June 30, 2017				March 31, 2017				December 31, 2016
	(In thousands, except per share data)
Revenues	$	253,205			$	230,986			$	228,378			$	219,600
Cost of revenues (1)	75,202				69,793				72,131				69,997
Gross profit	178,003				161,193				156,247				149,603
Net income	$	40,044			$	25,227			$	25,084			$	37,901
Earnings per share (2):
Basic	$	1.31			$	0.82			$	0.81			$	1.22
Diluted	$	1.25			$	0.78			$	0.78			$	1.16
Shares used in computing earnings per share:
Basic	30,534				30,914				31,017				30,989
Diluted	31,963				32,224				32,260				32,536

	Quarter Ended
	September 30, 2016				June 30, 2016				March 31, 2016				December 31, 2015
	(In thousands, except per share data)
Revenues	$	235,824			$	238,778			$	206,678			$	200,076
Cost of revenues (1)	74,298				66,384				62,298				62,193
Gross profit	161,526				172,394				144,380				137,883
Net income	$	32,104			$	34,987			$	23,116			$	19,241
Earnings per share (2):
Basic	$	1.04			$	1.12			$	0.74			$	0.62
Diluted	$	1.00			$	1.08			$	0.72			$	0.59
Shares used in computing earnings per share:
Basic	30,916				31,149				31,268				31,185
Diluted	32,221				32,313				32,262				32,436

(1)	Cost of revenues excludes amortization expense of $1.4 million, $1.7 million, $1.7 million, $1.7 million, $1.7 million, $1.8 million, $1.8 million and $1.9 million for the quarters ended September 30, 2017, June 30, 2017, March 31, 2017, December 31, 2016, September 30, 2016, June 30, 2016, March 31, 2016 and December 31, 2015, respectively.

FAIR ISAAC CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Years Ended September 30, 2017, 2016 and 2015

(2)	Earnings per share is computed independently for each of the quarters presented. Therefore, the sum of the quarterly per share amounts may not equal the totals for the respective years.

22. Subsequent Events

In October 2017, our Board of Directors approved a new stock repurchase program following the completion of a similar program that was approved in July 2016. 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.