Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Our Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) includes the following: a business overview that provides a high-level summary of our strategies and initiatives, financial results and bookings trends that affect our business; a more detailed analysis of our results of operations; our liquidity and capital resources, which discusses key aspects of our statements of cash flows, changes in our balance sheets and our financial commitments; and a summary of our critical accounting policies and estimates we believe are important to understanding the assumptions and judgments incorporated in our reported financial results. Our MD&A should be read in conjunction with Item 8, Financial Statements and Supplementary Data, of this Annual Report on Form 10-K. The following discussion contains forward-looking statements that are subject to risks and uncertainties. Actual results may differ from those referred to herein due to a number of factors, including but not limited to risks described in Item 1A, Risk Factors, in this Annual Report on Form 10-K.

BUSINESS OVERVIEW

Strategies and Initiatives

During fiscal 2019, our growth initiatives continued to generate significant free cash flow. We utilized our cash to enhance stockholder value through investments in long-term growth initiatives; acquisitions of relevant technologies and products that strengthen our portfolio and competitive position; and our stock repurchase programs.

We continued to transform our business from on-premises to recurring revenue associated with our cloud-based solutions in our Applications and Decision Management Software segments. Our continued product innovation provides growth opportunities with customers that can benefit from the affordability and simplicity of these solutions. The majority of our software solutions are now available through both the FICO® Analytic Cloud and AWS. During fiscal 2019, our cloud bookings accounted for 39% of our total bookings, compared to 35% during fiscal 2018.

For our Scores segment, our industry leading business-to-business FICO® Scores has achieved a multi-year expansion in the growing U.S. consumer market. We have launched numerous new FICO® Score based products, and continue to grow our partnership with Experian, a leading global information services provider. This partnership provides consumers the FICO® Score that lenders most commonly use in evaluating credit when determining applicant eligibility for new credit cards, car loans, mortgages or other lines of credit and can be accessed through Experian.com. The FICO® Score Open Access program, which allows our participating clients to provide their customers with a free FICO® Score along with content to help them understand the FICO® Score their lender uses, has more than 290 million consumer accounts with access to their free FICO® Scores. We continue to pursue additional partners to distribute FICO® Scores with their product offerings sold directly to consumers.

We continue to enhance stockholder value by returning cash to stockholders through our stock repurchase program. During fiscal 2019, we repurchased approximately 0.9 million shares at a total repurchase price of $228.9 million. As of September 30, 2019, we had $220.3 million remaining under our current stock repurchase program.

Overview of Financial Results

Total revenues for fiscal 2019 were $1.16 billion, an increase of 16% from $1.00 billion in fiscal 2018. We continue to drive growth in our Scores segment. Scores revenue increased 25% to $421.2 million in fiscal 2019 from $335.9 million in fiscal 2018, and Scores operating income increased 33% to $361.4 million in fiscal 2019 from $272.4 million in fiscal 2018. For our Applications and Decision Management Software segments, our cloud business continues to grow as we pursue our cloud-first strategy. Cloud revenues increased 12% to $270.4 million during fiscal 2019, from $240.9 million during fiscal 2018.

We derive a significant portion of revenues internationally, and 34% and 35% of total consolidated revenues were derived from clients outside the U.S. during fiscal 2019 and 2018, respectively. A significant portion of our revenues are derived from the sale of products and services within the banking (including consumer credit) industry, and 87% and 85% of our revenues were derived from within this industry during fiscal 2019 and 2018, respectively. In addition, we derive a significant share of revenues from transactional or unit-based software license fees, transactional fees derived under credit scoring, data processing, data management and SaaS subscription services arrangements, and annual software maintenance fees. Arrangements with transactional or unit-based pricing accounted for 74% and 75% of our revenues during fiscal 2019 and 2018, respectively. Revenue fluctuations in our business are primarily driven by changes in the transactional volume and license fees.

Operating income for fiscal 2019 was $253.5 million, an increase of 45% from $175.4 million in fiscal 2018. Operating margin was 22% and 18% for fiscal 2019 and 2018, respectively. As a result, net income increased 52% to $192.1 million in fiscal 2019 from $126.5 million in fiscal 2018. Diluted earnings per share for fiscal 2019 was $6.34, an increase of 56% from $4.06 in fiscal 2018.

Bookings

Management regards the volume of bookings achieved as an important indicator of future revenues, but they are not comparable to nor a substitute for an analysis of our revenues. Bookings represent contracts signed in the current reporting period that generate current and future revenue streams. While we disclose estimated revenue expected to be recognized in the future related to unsatisfied performance obligations in Note 16 to the accompanying consolidated financial statements, we believe bookings amount is still a meaningful measure of our business as it includes estimated revenues omitted from Note 16, such as sales- or usage-based royalties derived from our software licenses, among others.

We estimate bookings as of the end of the period in which a contract is signed and initial booking estimates are not updated in future periods for changes between estimated and actual results. Our calculations have varying degrees of certainty depending on the revenue type and individual contract terms. They are subject to a number of risks and uncertainties concerning timing and contingencies affecting product delivery and performance, and estimates consider contract terms, knowledge of the marketplace and experience with our customers, among other factors. Actual revenue and the timing thereof could differ materially from our initial estimates.

Although many of our contracts contain non-cancelable terms, most of our bookings are transactional or service related that depend upon estimates such as volume of transactions, number of active accounts, or number of hours incurred. Since these estimates cannot be considered fixed or firm, we do not believe it is appropriate to characterize bookings as backlog. The following paragraphs discuss the key assumptions used to calculate bookings and the susceptibility of these assumptions to variability for each revenue type.

Transactional and Maintenance Bookings

We calculate transactional bookings as the total estimated volume of transactions or number of accounts under contract, multiplied by the contractual rate. Transactional contracts generally span multiple years and require estimates of future transaction volumes or number of active accounts. We develop estimates from discussions with our customers and examinations of historical data from similar products and customer arrangements. Differences between estimated bookings and actual results occur due to variability in the volume of transactions or number of active accounts estimated. This variability is primarily caused by the economic trends in our customers’ industries; individual performance of our customers relative to their competitors; and regulatory and other factors that affect the business environment in which our customers operate.

We calculate maintenance bookings directly from the terms stated in the contract.

Professional Services Bookings

We calculate professional services bookings as the estimated number of hours to complete a project multiplied by the rate per hour. We estimate the number of hours based on our understanding of the project scope, conversations with customer personnel and our experience in estimating professional services projects. Estimated bookings may differ from actual results primarily due to differences in the actual number of hours incurred.

License Bookings

Licenses are sold on a perpetual or term basis and bookings generally equal the fixed amount stated in the contract.

Bookings Trend Analysis

	Bookings				Bookings Yield (1)			Number of Bookings over $1 Million			Weighted- Average Term (2)
	(In millions)										(months)
Quarter ended September 30, 2019	$	160.4			15	%		34			34
Quarter ended September 30, 2018	$	133.5			11	%		24			31
Year ended September 30, 2019	$	481.7			31	%		95			NM(a)
Year ended September 30, 2018	$	437.3			29	%		80			NM(a)

(1)	Bookings yield represents the percentage of revenue recognized from bookings for the periods indicated.

(2)	Weighted-average term of bookings measures the average term over which bookings are expected to be recognized as revenue.

(a)	NM - Measure is not meaningful as our estimate of bookings is as of the end of the period in which a contract is signed, and we do not update our initial booking estimates in future periods for changes between estimated and actual results.

Transactional and maintenance bookings were 48% and 46% of total bookings for the years ended September 30, 2019 and 2018, respectively. Professional services bookings were 39% and 43% of total bookings for the years ended September 30, 2019 and 2018, respectively. License bookings were 13% and 11% of total bookings for the years ended September 30, 2019 and 2018, respectively.

RESULTS OF OPERATIONS

We are organized into the following three reportable segments: Applications, Scores and Decision Management Software. Although we sell solutions and services into a large number of end user product and industry markets, our reportable business segments reflect the primary method in which management organizes and evaluates internal financial information to make operating decisions and assess performance. Segment revenues, operating income, and related financial information, including disaggregation of revenue, for the years ended September 30, 2019, 2018 and 2017 are set forth in Note 15 to the accompanying consolidated financial statements.

Revenues

The following tables set forth certain summary information on a segment basis related to our revenues for fiscal 2019, 2018 and 2017:

	Revenues Year Ended September 30,												Period-to-Period Change								Period-to-Period Percentage Change
Segment	2019				2018				2017				2019 to 2018				2018 to 2017				2019 to 2018			2018 to 2017
					As Adjusted				As Adjusted								As Adjusted							As Adjusted
	(In thousands)												(In thousands)
Applications	$	605,034			$	564,375			$	560,634			$	40,659			$	3,741			7	%		1	%
Scores	421,177				335,870				259,537				85,307				76,333				25	%		29	%
Decision Management Software	133,872				99,901				114,812				33,971				(14,911		)		34	%		(13	)%
Total	$	1,160,083			$	1,000,146			$	934,983			159,937				65,163				16	%		7	%

	Percentage of Revenues Year Ended September 30,
Segment	2019			2018			2017
				As Adjusted			As Adjusted
Applications	52	%		56	%		60	%
Scores	36	%		34	%		28	%
Decision Management Software	12	%		10	%		12	%
Total	100	%		100	%		100	%

Applications

	Year Ended September 30,												Period-to-Period Change								Period-to-Period Percentage Change
	2019				2018				2017				2019 to 2018				2018 to 2017				2019 to 2018			2018 to 2017
					As Adjusted				As Adjusted								As Adjusted							As Adjusted
	(In thousands)												(In thousands)
Transactional and maintenance	$	395,398			$	372,283			$	335,560			$	23,115			$	36,723			6	%		11	%
Professional services	137,258				142,736				140,990				(5,478		)		1,746				(4	)%		1	%
License	72,378				49,356				84,084				23,022				(34,728		)		47	%		(41	)%
Total	$	605,034			$	564,375			$	560,634			40,659				3,741				7	%		1	%

Applications segment revenues increased $40.7 million in fiscal 2019 from 2018 primarily due to a $50.6 million increase in our fraud solutions and a $7.3 million increase in our customer communication services, partially offset by an $8.7 million decrease in our customer management solutions and a $7.6 million decrease in our originations solutions. The increase in fraud solutions was primarily attributable to an increase in license and transactional revenues. The increase in customer communication services was primarily attributable to an increase in transactional revenue. The decrease in customer management solutions was primarily attributable to a decrease in license and services revenues. The decrease in originations solutions was primarily attributable to a decrease in services revenues.

Applications segment revenues increased $3.7 million in fiscal 2018 from 2017 primarily due to an $11.5 million increase in our customer communication services, a $6.6 million increase in our customer management solutions, a $6.3 million increase in our originations solutions, a $6.0 million increase in our compliance solutions, and a $3.2 million increase in our collections & recovery solutions, partially offset by a $29.9 million decrease in our fraud solutions. The increase in customer communication services was primarily attributable to an increase in transactional revenue. The increase in customer management solutions was primarily attributable to an increase in license and transactional revenues. The increase in originations solutions was primarily attributable to an increase in transactional and services revenues from our SaaS products. The increase in collections & recovery solutions was primarily attributable to an increase in license revenue. The increase in compliance solutions was attributable to an increase in all revenue types. The decrease in fraud solutions was primarily attributable to a decrease in license revenue.

Scores

	Year Ended September 30,												Period-to-Period Change								Period-to-Period Percentage Change
	2019				2018				2017				2019 to 2018				2018 to 2017				2019 to 2018			2018 to 2017
					As Adjusted				As Adjusted								As Adjusted							As Adjusted
	(In thousands)												(In thousands)
Transactional and maintenance	$	415,288			$	331,662			$	254,424			$	83,626			$	77,238			25	%		30	%
Professional services	2,157				1,900				2,869				257				(969		)		14	%		(34	)%
License	3,732				2,308				2,244				1,424				64				62	%		3	%
Total	$	421,177			$	335,870			$	259,537			85,307				76,333				25	%		29	%

Scores segment revenues increased $85.3 million in fiscal 2019 from 2018 due to an increase of $77.4 million in our business-to-business scores revenue and $7.9 million in our business-to-consumer services revenue. The increase in business-to-business scores was primarily attributable to a higher unit price in mortgage and auto activities. The increase in business-to-consumer services was primarily attributable to an increase in royalties derived from scores sold indirectly to consumers through credit reporting agencies.

Scores segment revenues increased $76.3 million in fiscal 2018 from 2017 due to an increase of $60.8 million in our business-to-business scores revenue and $15.5 million in our business-to-consumer services revenue. The increase in business-to-business scores was primarily attributable to a $48.1 million increase in transactional scores in originations, primarily driven by a higher unit price in mortgage activities; in addition, transactional scores in account management and prescreen increased $13.1 million driven by higher transactional volume. The increase in business-to-consumer services was primarily attributable to an increase in royalties derived from scores sold indirectly to consumers through credit reporting agencies.

During fiscal 2019, 2018 and 2017, revenues generated from our agreements with Experian accounted for 13%, 11% and 9%, respectively, of our total revenues, and revenues generated from our agreements with Equifax and TransUnion together accounted for 16%, 14% and 11%, respectively, of our total revenues. Revenues from these customers included amounts recorded in our other segments.

Decision Management Software

	Year Ended September 30,												Period-to-Period Change								Period-to-Period Percentage Change
	2019				2018				2017				2019 to 2018				2018 to 2017				2019 to 2018			2018 to 2017
					As Adjusted				As Adjusted								As Adjusted							As Adjusted
	(In thousands)												(In thousands)
Transactional and maintenance	$	50,262			$	46,658			$	43,943			$	3,604			$	2,715			8	%		6	%
Professional services	44,680				32,274				34,045				12,406				(1,771		)		38	%		(5	)%
License	38,930				20,969				36,824				17,961				(15,855		)		86	%		(43	)%
Total	$	133,872			$	99,901			$	114,812			33,971				(14,911		)		34	%		(13	)%

Decision Management Software segment revenues increased $34.0 million primarily attributable to an increase in both of our license sales and SaaS subscription revenue, as well as an increase in services revenues related to our Decision Management Platform product.

Decision Management Software segment revenues decreased $14.9 million in fiscal 2018 from 2017 primarily attributable to a decrease in license revenue related to our FICO® Blaze Advisor®.

Operating Expenses and Other Income (Expense), Net

The following tables set forth certain summary information related to our consolidated statements of income and comprehensive income for the fiscal 2019, 2018 and 2017:

	Year Ended September 30,												Period-to-Period Change								Period-to-Period Percentage Change
	2019				2018				2017				2019 to 2018				2018 to 2017				2019 to 2018			2018 to 2017
					As Adjusted				As Adjusted								As Adjusted							As Adjusted
	(In thousands, except employees)												(In thousands, except employees)
Revenues	$	1,160,083			$	1,000,146			$	934,983			$	159,937			$	65,163			16	%		7	%
Operating expenses:
Cost of revenues	336,845				312,898				287,607				23,947				25,291				8	%		9	%
Research and development	149,478				128,383				110,870				21,095				17,513				16	%		16	%
Selling, general and administrative	414,086				376,912				337,167				37,174				39,745				10	%		12	%
Amortization of intangible assets	6,126				6,594				12,709				(468		)		(6,115		)		(7	)%		(48	)%
Restructuring and acquisition-related	—				—				4,471				—				(4,471		)		—	%		(100	)%
Total operating expenses	906,535				824,787				752,824				81,748				71,963				10	%		10	%
Operating income	253,548				175,359				182,159				78,189				(6,800		)		45	%		(4	)%
Interest expense, net	(39,752		)		(31,311		)		(25,790		)		(8,441		)		(5,521		)		27	%		21	%
Other income (expense), net	2,276				12,884				(86		)		(10,608		)		12,970				(82	)%		(15,081	)%
Income before income taxes	216,072				156,932				156,283				59,140				649				38	%		—	%
Provision for income taxes	23,948				30,450				22,869				(6,502		)		7,581				(21	)%		33	%
Net income	$	192,124			$	126,482			$	133,414			65,642				(6,932		)		52	%		(5	)%
Number of employees at fiscal year-end	4,009				3,668				3,299				341				369				9	%		11	%

	Percentage of Revenues Year Ended September 30,
	2019			2018			2017
				As Adjusted			As Adjusted
Revenues	100	%		100	%		100	%
Operating expenses:
Cost of revenues	29	%		31	%		31	%
Research and development	13	%		13	%		12	%
Selling, general and administrative	35	%		37	%		36	%
Amortization of intangible assets	1	%		1	%		1	%
Restructuring and acquisition-related	—	%		—	%		1	%
Total operating expenses	78	%		82	%		81	%
Operating income	22	%		18	%		19	%
Interest expense, net	(3	)%		(3	)%		(3	)%
Other income (expense), net	—	%		1	%		—	%
Income before income taxes	19	%		16	%		16	%
Provision for income taxes	2	%		3	%		2	%
Net income	17	%		13	%		14	%

Cost of Revenues

Cost of revenues consists primarily of employee salaries and benefits for personnel directly involved in developing, installing and supporting revenue products; travel costs; overhead costs; outside services; internal network hosting costs; software royalty fees; and credit bureau data and processing services.

The fiscal 2019 over 2018 increase of $23.9 million in cost of revenues expenses was primarily attributable to a $13.9 million increase in personnel and labor costs and a $6.7 million increase in facilities and infrastructure costs. The increase in personnel and labor costs was primarily attributable to an increase in headcount. The increase in facilities and infrastructure costs was primarily attributable to increased resource requirement due to expansion in our cloud infrastructure operations. Cost of revenues as a percentage of revenues decreased to 29% during fiscal 2019 from 31% during fiscal 2018 primarily due to increased sales of our high-margin Scores and software products.

The fiscal 2018 over 2017 increase of $25.3 million in cost of revenues expenses was primarily attributable to a $13.4 million increase in facilities and infrastructure costs and a $9.4 million increase in personnel and labor costs. The increase in facilities and infrastructure costs was primarily attributable to increased resource requirement due to expansion in our cloud infrastructure operations. The increase in personnel and labor costs was primarily attributable to an increase in incentive cost and share-based compensation costs. Cost of revenues as a percentage of revenues was 31% during fiscal 2018, consistent with that incurred during fiscal 2017.

Research and Development

Research and development expenses include the personnel and related overhead costs incurred in the development of new products and services, including the research of mathematical and statistical models and the development of new versions of our products.

The fiscal 2019 over 2018 increase of $21.1 million in research and development expenses was primarily attributable to a $15.6 million increase in personnel and labor costs as a result of increased headcount, and a $3.5 million increase in facilities and infrastructure cost. Research and development expenses as a percentage of revenues was 13% during fiscal 2019, consistent with that incurred during fiscal 2018.

The fiscal 2018 over 2017 increase of $17.5 million in research and development expenses was primarily attributable to a $14.8 million increase in personnel and labor costs as a result of our continued investment in the areas of cloud computing and SaaS, as well as new products. Research and development expenses as a percentage of revenues was 13% during fiscal 2018, materially consistent with those incurred during fiscal 2017.

Selling, General and Administrative

Selling, general and administrative expenses consist principally of employee salaries and benefits; travel costs; overhead costs; advertising and other promotional expenses; corporate facilities expenses; legal expenses; business development expenses and the cost of operating computer systems.

The fiscal 2019 over 2018 increase of $37.2 million was primarily attributable to an increase in personnel and labor costs as a result of increased headcount, higher share-based compensation and higher non-capitalizable commission cost. Selling, general and administrative expenses as a percentage of revenues decreased to 35% during fiscal 2019 from 37% during fiscal 2018 primarily due to increased sales of our high-margin Scores and software products.

The fiscal 2018 over 2017 increase of $39.7 million was primarily attributable to a $27.4 million increase in personnel and labor costs as a result of increased headcount, higher share-based compensation and incentive costs; as well as a $10.1 million increase in marketing and travel costs, primarily driven by a company-wide marketing event during fiscal 2018. Selling, general and administrative expenses as a percentage of revenues was 37% during fiscal 2018, materially consistent with those incurred during fiscal 2017.

Amortization of Intangible Assets

Amortization of intangible assets consists of expense related to intangible assets recorded in connection with our acquisitions. Our finite-lived intangible assets consist primarily of completed technology and customer contracts and relationships, which are being amortized using the straight-line method over periods ranging from four to fifteen years.

Amortization expense was $6.2 million, $6.6 million and $12.7 million for fiscal 2019, 2018 and 2017 respectively. The fiscal 2018 over fiscal 2017 decrease of $6.1 million was primarily attributable to certain intangible assets associated with our Adeptra and HNC acquisitions becoming fully amortized in fiscal 2017.

Restructuring and Acquisition-Related

There were no restructuring or acquisition-related expenses incurred during fiscal 2019 and 2018.

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 employee separation costs 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 were paid before the end of the second quarter of fiscal 2018. There were no acquisition-related expenses incurred during fiscal 2017.

Interest Expense, Net

Interest expense includes primarily interest on the senior notes issued in May 2008, July 2010 and May 2018, as well as interest and credit facility fees on the revolving line of credit. On our consolidated statements of income and comprehensive income, interest expense is netted with interest income, which is derived primarily from the investment of funds in excess of our immediate operating requirements.

The fiscal 2019 over 2018 increase in net interest expense of $8.4 million was primarily attributable to a higher average outstanding debt balance during fiscal 2019, as well as a higher average interest rate on our 2018 Senior Notes compared to that on our revolving line of credit.

The fiscal 2018 over 2017 increase in net interest expense of $5.5 million was primarily attributable to a higher average outstanding debt balance during fiscal 2018, as well as a higher average interest rate on our 2018 Senior Notes compared to that on our revolving line of credit.

Other Income (Expense), Net

Other income (expense), net consists primarily of realized investment gains/losses and unrealized gains/losses on certain investments classified as trading securities, exchange rate gains/losses resulting from re-measurement of foreign-currency-denominated receivable and cash balances held by our various reporting entities into their respective functional currencies at period-end market rates, net of the impact of offsetting foreign currency forward contracts, and other non-operating items.

The fiscal 2019 over 2018 decrease in other income (expense), net of $10.6 million was primarily attributable to a non-operating gain related to the divestiture of an investment during fiscal 2018.

The fiscal 2018 over 2017 change in other income (expense), net of $13.0 million was primarily attributable to a non-operating gain related to the divestiture of an investment, as well as an increase in foreign currency exchange gain during fiscal 2018.

Provision for Income Taxes

Our effective tax rates were 11.1%, 19.4% and 14.6% in fiscal 2019, 2018 and 2017, respectively.

The decrease in our income tax provision in fiscal 2019 compared to fiscal 2018 is due to the decrease in the overall federal tax rate from the blended 24.5% in fiscal 2018 to 21% in fiscal 2019 and the recording of several one-time items in fiscal 2018 related to the enactment of the Tax Cuts and Jobs Act of 2017 (the “Tax Act”).

The increase in our income tax provision in fiscal 2018 compared to fiscal 2017 was primarily due to recording the impact related to the enactment of the Tax Act in fiscal 2018. This includes re-measurement to our deferred for the tax rate changes, the one-time deemed repatriation transition tax, and the loss of deductibility of performance-based compensation for certain employees.

As of September 30, 2019, we have approximately $95.6 million of unremitted earnings of non-U.S. subsidiaries. The Company generates substantial cash flow in the U.S. and does not have a current need for the cash to be returned to the U.S. from the foreign entities. In the event these earnings are later remitted to the U.S., any estimated withholding tax on remittance of those earnings is expected to be immaterial to the income tax provision.

Operating Income

The following tables set forth certain summary information on a segment basis related to our operating income for the fiscal 2019, 2018 and 2017:

	Year Ended September 30,												Period-to-Period Change								Period-to-Period Percentage Change
Segment	2019				2018				2017				2019 to 2018				2018 to 2017				2019 to 2018			2018 to 2017
					As Adjusted				As Adjusted								As Adjusted							As Adjusted
	(In thousands)												(In thousands)
Applications	$	161,162			$	143,964			$	168,327			$	17,198			$	(24,363	)		12	%		(14	)%
Scores	361,356				272,418				205,168				88,938				67,250				33	%		33	%
Decision Management Software	(35,116		)		(34,360		)		(8,027		)		(756		)		(26,333		)		2	%		328	%
Unallocated corporate expenses	(144,755		)		(125,255		)		(104,907		)		(19,500		)		(20,348		)		16	%		19	%
Total segment operating income	342,647				256,767				260,561				85,880				(3,794		)		33	%		(1	)%
Unallocated share-based compensation	(82,973		)		(74,814		)		(61,222		)		(8,159		)		(13,592		)		11	%		22	%
Unallocated amortization expense	(6,126		)		(6,594		)		(12,709		)		468				6,115				(7	)%		(48	)%
Unallocated restructuring and acquisition-related	—				—				(4,471		)		—				4,471				—	%		(100	)%
Operating income	$	253,548			$	175,359			$	182,159			78,189				(6,800		)		45	%		(4	)%

Applications

	Year Ended September 30,												Percentage of Revenues
	2019				2018				2017				2019			2018			2017
					As Adjusted				As Adjusted							As Adjusted			As Adjusted
	(In thousands)
Segment revenues	$	605,034			$	564,375			$	560,634			100	%		100	%		100	%
Segment operating expenses	(443,872		)		(420,411		)		(392,307		)		(73	)%		(74	)%		(70	)%
Segment operating income	$	161,162			$	143,964			$	168,327			27	%		26	%		30	%

Scores

	Year Ended September 30,												Percentage of Revenues
	2019				2018				2017				2019			2018			2017
					As Adjusted				As Adjusted							As Adjusted			As Adjusted
	(In thousands)
Segment revenues	$	421,177			$	335,870			$	259,537			100	%		100	%		100	%
Segment operating expenses	(59,821		)		(63,452		)		(54,369		)		(14	)%		(19	)%		(21	)%
Segment operating income	$	361,356			$	272,418			$	205,168			86	%		81	%		79	%

Decision Management Software

	Year Ended September 30,												Percentage of Revenues
	2019				2018				2017				2019			2018			2017
					As Adjusted				As Adjusted							As Adjusted			As Adjusted
	(In thousands)
Segment revenues	$	133,872			$	99,901			$	114,812			100	%		100	%		100	%
Segment operating expenses	(168,988		)		(134,261		)		(122,839		)		(126	)%		(134	)%		(107	)%
Segment operating loss	$	(35,116	)		$	(34,360	)		$	(8,027	)		(26	)%		(34	)%		(7	)%

The fiscal 2019 over 2018 increase in operating income of $78.2 million was attributable to a $160.0 million increase in segment revenues and a $0.5 million decrease in amortization expense, partially offset by a $54.6 million increase in segment operating expenses, a $19.5 million increase in unallocated corporate expenses and an $8.2 million increase in share-based compensation expense.

At the segment level, the $85.9 million increase in segment operating income was the result of an $88.9 million increase in our Scores segment operating income and a $17.2 million increase in our Applications segment operating income, partially offset by a $19.5 million increase in unallocated corporate expenses primarily driven by an increase in unallocated incentive cost and a $0.7 million increase in our Decision Management Software segment operating loss.

The $17.2 million increase in Applications segment operating income was attributable to a $40.7 million increase in segment revenue, partially offset by a $23.5 million increase in segment operating expenses. Segment operating income as a percentage of segment revenue for Applications increased to 27% from 26% mainly due to an increase in sales of our higher-margin software products.

The $88.9 million increase in Scores segment operating income was attributable to an $85.3 million increase in segment revenue as well as a $3.6 million decrease in segment operating expenses. Segment operating income as a percentage of segment revenue for Scores increased to 86% from 81% mainly due to an increase in sales of our higher-margin score products.

The $0.7 million increase in Decision Management Software segment operating loss was attributable to a $34.7 million increase in segment operating expenses, partially offset by a $34.0 million increase in segment revenue. Segment operating margin for Decision Management Software improved to a negative 26% from a negative 34% mainly due to an increase in sales of our higher-margin software products, partially offset by our continued investment in cloud infrastructure operations and new products.

The fiscal 2018 over 2017 decrease in operating income of $6.8 million was attributable to a $48.6 million increase in segment operating expenses, a $20.3 million increase in unallocated corporate expenses and a $13.6 million increase in share-based compensation expense, partially offset by a $65.1 million increase in segment revenues, a $6.1 million decrease in amortization expense and a $4.5 million decrease in restructuring and acquisition-related expenses.

At the segment level, the $3.8 million decrease in segment operating income was the result of a $26.3 million increase in our Decision Management Software segment operating loss, a $24.4 million decrease in our Applications segment operating income, and a $20.3 million increase in unallocated corporate expenses primarily driven by an increase in unallocated incentive cost and a one-time settlement during fiscal 2017, partially offset by a $67.2 million increase in our Scores segment operating income.

The $24.4 million decrease in Applications segment operating income was attributable to a $28.1 million increase in segment operating expenses, partially offset by a $3.7 million increase in segment revenue. Segment operating income as a percentage of segment revenue for Applications decreased to 26% from 30% mainly due to a decrease in sales of our higher-margin software products.

The $67.2 million increase in Scores segment operating income was attributable to a $76.3 million increase in segment revenue, partially offset by a $9.1 million increase in segment operating expenses. Segment operating income as a percentage of segment revenue for Scores increased to 81% from 79% mainly due to an increase in sales of our higher-margin score products.

The $26.3 million increase in Decision Management Software segment operating loss was attributable to a $14.9 million decrease in segment revenue and an $11.4 million increase in segment operating expenses. Segment operating margin for Decision Management Software decreased to a negative 34% from a negative 7% mainly due to a decrease in sales of our higher-margin software products, as well as our continued investment in cloud infrastructure operations and new products.

CAPITAL RESOURCES AND LIQUIDITY

Outlook

As of September 30, 2019, we had $106.4 million in cash and cash equivalents, which included $81.1 million held off-shore by our foreign subsidiaries. We believe these balances, as well as available borrowings from our $400 million revolving line of credit and anticipated cash flows from operating activities, will be sufficient to fund our working and other capital requirements as well as the $85.0 million principal payment due in July 2020 on our senior notes issued in July 2010. Under our current financing arrangements, we have no other significant debt obligations maturing over the next twelve months. Additionally, though we do not anticipate the need to repatriate any undistributed earnings from our foreign subsidiaries for the foreseeable future, we may take advantage of opportunities where we are able to repatriate these earnings to the U.S. without material incremental tax provision.

In the normal course of business, we evaluate the merits of acquiring technology or businesses, or establishing strategic relationships with or investing in these businesses. We may elect to use available cash and cash equivalents to fund such activities in the future. In the event additional needs for cash arise, or if we refinance our existing debt, we may raise additional funds from a combination of sources, including the potential issuance of debt or equity securities. Additional financing might not be available on terms favorable to us, or at all. If adequate funds were not available or were not available on acceptable terms, our ability to take advantage of unanticipated opportunities or respond to competitive pressures could be limited.

Summary of Cash Flows

	Year Ended September 30,
	2019				2018				2017
	(In thousands)
Cash provided by (used in):
Operating activities	$	260,350			$	223,052			$	225,644
Investing activities	(42,760		)		(14,119		)		(20,605		)
Financing activities	(200,047		)		(218,627		)		(180,625		)
Effect of exchange rate changes on cash	(1,140		)		(5,901		)		5,278
Increase (decrease) in cash and cash equivalents	$	16,403			$	(15,595	)		$	29,692

Cash Flows from Operating Activities

Our primary method for funding operations and growth has been through cash flows generated from operating activities. Net cash provided by operating activities totaled $260.4 million in fiscal 2019 compared to $223.1 million in fiscal 2018. The $37.3 million increase was attributable to a $65.6 increase in net income as well as an $18.7 million increase in non-cash items, partially offset by a $47.0 million decrease that resulted from timing of receipts and payments in our ordinary course of business.

Net cash provided by operating activities totaled $223.1 million in fiscal 2018 compared to $225.6 million in fiscal 2017. The $2.5 million decrease was attributable to a $7.8 million decrease that resulted from timing of receipts and payments in our ordinary course of business and a $6.9 million decrease in net income, partially offset by a $12.2 million increase in non-cash items.

Cash Flows from Investing Activities

Net cash used in investing activities totaled $42.8 million in fiscal 2019 compared to $14.1 million in fiscal 2018. The $28.7 million increase was primarily attributable to a $20.0 million decrease in proceeds from the sale of cost method investment and a $15.9 million increase in net cash used for acquisition, partially offset by a $7.3 million decrease in net cash used for purchases of property and equipment.

Net cash used in investing activities totaled $14.1 million in fiscal 2018 compared to $20.6 million in fiscal 2017. The $6.5 million decrease was primarily attributable to a $20.0 million increase in proceeds from the sale of cost method investment, partially offset by an $11.5 million increase in net cash used for purchases of property and equipment as well as a $2.8 million increase in purchases, net of proceeds from sale, of marketable securities.

Cash Flows from Financing Activities

Net cash used in financing activities totaled $200.0 million in fiscal 2019 compared to $218.6 million in fiscal 2018. The $18.6 million decrease was primarily due to a $192.0 million decrease in payments, net of proceeds, on our revolving line of credit, a $113.7 million decrease in net cash used for repurchases of common stock and an $11.8 million increase in proceeds from issuance of treasury stock under employee stock plans, partially offset by a $297.0 million decrease in proceeds, net of payments, from our senior notes.

Net cash used in financing activities totaled $218.6 million in fiscal 2018 compared to $180.6 million in fiscal 2017. The $38.0 million increase was primarily due to a $210.0 million increase in payments, net of proceeds, on our revolving line of credit, a $155.0 million increase in net cash used for repurchases of common stock and a $7.8 million increase in debt issuance cost, partially offset by a $341.0 million increase in proceeds, net of payments, from our senior notes.

Repurchases of Common Stock

In July 2018, our Board of Directors approved a stock repurchase program following the completion of the previously authorized program. This program was 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. In July 2019, our Board of Directors approved a new stock repurchase program following the completion of the July 2018 program. This 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. As of September 30, 2019, we had $220.3 million remaining under this authorization. During fiscal 2019, 2018 and 2017, we expended $228.9 million, $336.9 million and $193.3 million, respectively, under these and previously authorized stock repurchase programs.

Dividends

We paid dividends of $0.02 per share on a quarterly basis during the first two quarters of our fiscal 2017. In May 2017, our Board of Directors discontinued cash dividend payments in favor of using our excess cash flow for share repurchases.

Revolving Line of Credit

On May 8, 2018, we amended our credit agreement with a syndicate of banks, extending the maturity date of the unsecured revolving line of credit from December 30, 2019 to May 8, 2023, while reducing our borrowing capacity to $400 million with an option to increase it by another $100 million. Proceeds from the credit facility can be used for working capital and general corporate purposes and may also be used for the refinancing of existing debt, acquisitions and the repurchase of our common stock. Interest on amounts borrowed under the credit facility is based on (i) a base rate, which is the greater of (a) the prime rate, (b) the Federal Funds rate plus 0.500% and (c) the one-month LIBOR rate plus 1.000%, plus, in each case, an applicable margin, or (ii) an adjusted LIBOR rate plus an applicable margin. The applicable margin for base rate borrowings ranges from 0% to 0.875% and for LIBOR borrowings ranges from 1.000% to 1.875%, and is determined based on our consolidated leverage ratio. In addition, we must pay credit facility fees. The credit facility contains certain restrictive covenants including maintaining a maximum consolidated leverage ratio of 3.25, subject to a step up to 3.75 following certain permitted acquisitions; and a minimum fixed charge ratio of 2.50 through the maturity of our 2010 Senior Notes in July 2020 (as defined below), upon which maintaining a minimum interest coverage ratio of 3.00. The credit agreement also contains other covenants typical of unsecured facilities. As of September 30, 2019, we had $345.0 million in borrowings outstanding at a weighted average interest rate of 3.423% and were in compliance with all financial covenants under this credit facility.

Senior Notes

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”). The 2010 Senior Notes were issued in four series with maturities ranging from 6 to 10 years. The outstanding 2010 Senior Notes’ weighted average interest rate is 5.59% and the weighted average maturity is 10 years. The 2010 Senior Notes require interest payments semi-annually and contain certain restrictive covenants, including the maintenance of a maximum consolidated net debt to consolidated EBITDA ratio of 3.00 and a minimum fixed charge coverage ratio of 2.50. On May 8, 2018, we issued $400 million of senior notes in a private offering to qualified institutional investors (the “2018 Senior Notes”, and with the 2010 Senior Notes, the “Senior Notes”). The 2018 Senior Notes require interest payments semi-annually at a rate of 5.25% per annum and will mature on May 15, 2026. The purchase agreement for the 2010 Senior Notes and the indenture for the 2018 Senior Notes contain certain covenants typical of unsecured obligations. As of September 30, 2019, the carrying value of the Senior Notes was $485.0 million and we were in compliance with all financial covenants under the purchase agreement and the indenture, respectively.

Contractual Obligations

The following table presents a summary of our contractual obligations at September 30, 2019:

	Year Ending September 30,																				Thereafter				Total
	2020				2021				2022				2023				2024
	(In thousands)
Senior notes (1)	$	85,000			$	—			$	—			$	—			$	—			$	400,000			$	485,000
Revolving line of credit													345,000
Interest due on debt obligations (2)	25,752				21,000				21,000				21,000				21,000				42,000				151,752
Capital lease obligations	1,935				1,934				1,934				—				—				—				5,803
Operating lease obligations	19,842				19,969				17,677				16,940				14,887				24,431				113,746
Purchase obligations (3)	7,000
Unrecognized tax benefits (4)	—				—				—				—				—				—				5,834
Total commitments	$	139,529			$	42,903			$	40,611			$	382,940			$	35,887			$	466,431			$	762,135

(1)	Represents the unpaid principal amount of the Senior Notes.

(2)	Represents interest payments on the Senior Notes.

(3)	Represents amounts associated with agreements that are enforceable, legally binding and specify terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the approximate timing of the payments.

(4)	Represents unrecognized tax benefits related to uncertain tax positions. As we are not able to reasonably estimate the timing of the payments or the amount by which the liability will increase or decrease over time, the related balances have not been reflected in the section of the table showing payment by fiscal year.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures, or capital resources.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

We prepare our consolidated financial statements in conformity with U.S. generally accepted accounting principles. These accounting principles require management to make certain judgments and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. We periodically evaluate our estimates including those relating to revenue recognition, goodwill and other intangible assets resulting from business acquisitions, share-based compensation, income taxes and contingencies and litigation. We base our estimates on historical experience and various other assumptions that we believe to be reasonable based on the specific circumstances, the results of which form the basis for making judgments about the carrying value of certain assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

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

Revenue Recognition

Contracts with Customers

Our revenue is primarily derived from term-based or perpetual licensing of software and scoring products and solutions, and associated maintenance; SaaS subscription services; scoring and credit monitoring services for consumers; and professional services. For contracts with customers that contain various combinations of products and services, we evaluate whether the products or services are distinct—distinct products or services will be accounted for as separate performance obligations, while non-distinct products or services are combined with others to form a single performance obligation. For contracts with multiple performance obligations, the transaction price is allocated to each performance obligation on a relative standalone selling price (“SSP”) basis. Revenue is recognized when control of the promised goods or services is transferred to our customers.

License revenue is derived from contracts in which we grant our direct customers or distributors the right to deploy or resell our software and scoring products and solutions on-premises. Our software offerings often include a perpetual or term-based license and post-contract support or maintenance, both of which generally represent distinct performance obligations and are accounted for separately. The transaction price is either in the form of a fixed consideration with separate stated prices for license and maintenance, or a sales or usage-based royalty—sometimes subject to a guaranteed minimum—for the license and maintenance bundle. When the amount is in the form of a fixed consideration, including the guaranteed minimum in sales or usage-based royalty, license revenue from distinct on-premises license is recognized at the point in time when the software or scoring solution is made available to the customer or distributor. Any royalties not subject to the guaranteed minimum or earned in excess of the minimum amount are recognized as transactional revenue when the subsequent sales or usage occurs. Revenue allocated to maintenance is generally recognized ratably over the contract period as customers simultaneously consume and receive benefits.

In addition to sales or usage-based royalty on our software and scoring products, transactional revenue is also derived from SaaS contracts in which we provide customers with access to and standard support for our software application either in the FICO® Analytic Cloud or AWS, our primary cloud infrastructure provider, on a subscription basis. The transaction price typically includes a fixed consideration in the form of a guaranteed minimum that allows up to a certain level of usage and a variable consideration in the form of usage or transaction-based fees in excess of the minimum threshold; or usage or transaction-based variable amount not subject to a minimum threshold. We determined the nature of our SaaS arrangements is to provide continuous access to our hosted application in the cloud, i.e., a stand-ready obligation that comprises a series of distinct service periods (e.g., a series of distinct daily, monthly or annual periods of service). We estimate the total variable consideration at contract inception—subject to any constraints that may apply—and update the estimates as new information becomes available and recognize the amount ratably over the SaaS service period, unless we determine it is appropriate to allocate the variable amount to each distinct service period and recognize revenue as each distinct service period is performed.

We also derive transactional revenue from credit scoring and monitoring services that provide consumers access to their credit reports and enable them to monitor their credit. These are provided as either a one-time or ongoing subscription service renewed monthly or annually, all with a fixed consideration. We determined the nature of the subscription service is a stand-ready obligation to generate credit reports, provide credit monitoring and other services for our customers, which comprises a series of distinct service periods (e.g., a series of distinct daily, monthly or annual periods of service). Revenue from one-time or monthly subscription services is recognized during the period when service is performed. Revenue from annual subscription services is recognized ratably over the subscription period.

Professional services include software or SaaS implementation, consulting, model development, training services and premium cloud support. They are sold either standalone, or together with other products or services and generally represent distinct performance obligations. The transaction price can be a fixed amount or on a time and materials basis. Revenue on fixed-price services is recognized using an input method based on labor hours expended which we believe provides a faithful depiction of the transfer of services. Revenue on services provided on a time and materials basis is recognized applying the “right-to-invoice” practical expedient as the amount to which we have a right to invoice the customer corresponds directly with the value of our performance to the customer. In addition, we sell premium cloud support on a subscription basis for a fixed amount, and revenue is recognized ratably over the contract term.

Significant Judgments

Our contracts with customers often include promises to transfer multiple products and services to a customer. Determining whether products and services are considered distinct and should be accounted for separately may require significant judgment. Specifically, when implementation service is included in the original software or SaaS offerings, judgment is required to determine if the implementation service significantly modifies or customizes the software or SaaS service in such a way that the risks of providing it and the customization service are inseparable. In rare instances, contracts may include significant modification or customization of the software of SaaS service and will result in the combination of software or SaaS service and implementation service as one performance obligation.

We determine the SSPs using data from our historical standalone sales, or, in instances where such information is not available (such as when we do not sell the product or service separately), we consider factors such as the stated contract prices, our overall pricing practices and objectives, go-to-market strategy, size and type of the transactions, and effects of the geographic area on pricing, among others. When the selling price of a product or service is highly variable, we may use the residual approach to determine the SSP of that product or service. Significant judgment may be required to determine the SSP for each distinct performance obligation when it involves the consideration of many market conditions and entity-specific factors discussed above.

Significant judgment may be required to determine the timing of satisfaction of a performance obligation in certain professional services contracts with a fixed consideration, in which we measure progress using an input method based on labor hours expended. In order to estimate the total hours of the project, we make assumptions about labor utilization, efficiency of processes, the customer’s specification and IT environment, among others. For certain complex projects, due to the risks and uncertainties inherent with the estimation process and factors relating to the assumptions, actual progress may differ due to the change in estimated total hours. Adjustments to estimates are made in the period in which the facts requiring such revisions become known and, accordingly, recognized revenues are subject to revisions as the contract progresses to completion.

Capitalized Commission Costs

We capitalize incremental commission fees paid as a result of obtaining customer contracts. Capitalized commission costs are amortized on a straight-line basis over ten years — determined using a portfolio approach — based on the transfer of goods or services to which the assets relate, taking into consideration both the initial and future contracts as we do not typically pay a commission on a contract renewal. The amortization costs are included in selling, general, and administrative expenses of our consolidated statements of income and comprehensive income.

We apply a practical expedient to recognize the incremental costs of obtaining contracts as an expense when incurred if the amortization period of the assets that we otherwise would have recognized is one year or less. These costs are recorded within selling, general, and administrative expenses.

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.

Examples of critical estimates in valuing certain of the intangible assets we have acquired include but are not limited to: (i) future expected cash flows from software license sales, support agreements, consulting contracts, other customer contracts and acquired developed technologies and patents; (ii) expected costs to develop the in-process research and development into commercially viable products and estimated cash flows from the projects when completed; and (iii) the acquired company’s brand and competitive position, as well as assumptions about the period of time the acquired brand will continue to be used in the combined company’s product portfolio. Unanticipated events and circumstances may occur that may affect the accuracy or validity of such assumptions, estimates or actual results. Historically, there have been no significant changes in our estimates or assumptions. To the extent a significant acquisition is made during a fiscal year, as appropriate we will expand the discussion to include specific assumptions and inputs used to determine the fair value of our acquired intangible assets.

In addition, uncertain tax positions and tax-related valuation allowances assumed in connection with a business combination are initially estimated as of the acquisition date. We reevaluate these items quarterly based upon facts and circumstances that existed as of the acquisition date with any adjustments to our preliminary estimates being recorded to goodwill provided that we are within the measurement period. Subsequent to the measurement period or our final determination of the tax allowance’s or contingency’s estimated value, whichever comes first, changes to these uncertain tax positions and tax-related valuation allowances will affect our provision for income taxes in our consolidated statements of income and comprehensive income and could have a material impact on our consolidated results of operations and financial position. Historically, there have been no significant changes in our valuation allowances or uncertain tax positions as it relates to business combinations. We do not believe there is a reasonable likelihood there will be a material change in the future estimates.

Goodwill, Acquisition Intangibles and Other Long-Lived Assets - Impairment Assessment

Goodwill represents the excess of cost over the fair value of identifiable assets acquired and liabilities assumed in business combinations. We assess goodwill for impairment for each of our reporting units on an annual basis during the fourth quarter using a July 1 measurement date unless circumstances require a more frequent measurement. We have determined that our reporting units are the same as our reportable segments. When evaluating goodwill for impairment, we may first perform an assessment qualitatively whether it is more likely than not that a reporting unit's carrying amount exceeds its fair value, referred to as a “step zero” approach. If, based on the review of the qualitative factors, we determine it is not more likely than not that the fair value of a reporting unit is less than its carrying value, we would bypass the two-step impairment test. Events and circumstances we consider in performing the “step zero” qualitative assessment include macro-economic conditions, market and industry conditions, internal cost factors, share price fluctuations, and the operational stability and the overall financial performance of the reporting units. If we conclude that it is more likely than not that a reporting unit's fair value is less than its carrying amount, we would perform the first step (“step one”) of the two-step impairment test and calculate the estimated fair value of the reporting unit by using discounted cash flow valuation models and by comparing our reporting units to guideline publicly-traded companies. These methods require estimates of our future revenues, profits, capital expenditures, working capital, and other relevant factors, as well as selecting appropriate guideline publicly-traded companies for each reporting unit. We estimate these amounts by evaluating historical trends, current budgets, operating plans, industry data, and other relevant factors. Using assumptions that are different from those used in our estimates, but in each case reasonable, could produce significantly different results and materially affect the determination of fair value and/or goodwill impairment for each reporting unit. For example, if the economic environment impacts our forecasts beyond what we have anticipated, it could cause the fair value of a reporting unit to fall below its respective carrying value.

For fiscal 2017, we elected to proceed directly to the step one quantitative analysis for all of our reporting units, as three years had elapsed since the date of our previous quantitative valuation. There was a substantial excess of fair value over carrying value for each of our reporting units and we determined goodwill was not impaired for any of our reporting units for fiscal 2017. For fiscal 2018 and 2019, 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 and determined goodwill was not impaired for any of our reporting units for fiscal 2018 and 2019.

Our intangible assets that have finite useful lives and other long-lived assets are assessed for potential impairment when there is evidence that events and circumstances related to our financial performance and economic environment indicate the carrying amount of the assets may not be recoverable. When impairment indicators are identified, we test for impairment using undiscounted cash flows. If such tests indicate impairment, then we measure and record the impairment as the difference between the carrying value of the asset and the fair value of the asset. Significant management judgment is required in forecasting future operating results used in the preparation of the projected cash flows. Should different conditions prevail, material write downs of our intangible assets or other long-lived assets could occur. We review the estimated remaining useful lives of our acquired intangible assets at each reporting period. A reduction in our estimate of remaining useful lives, if any, could result in increased annual amortization expense in future periods. We did not recognize any impairment charges on intangible assets that have finite useful lives or other long-lived assets in fiscal 2019, 2018 and 2017.

As discussed above, while we believe that the assumptions and estimates utilized were appropriate based on the information available to management, different assumptions, judgments and estimates could materially affect our impairment assessments for our goodwill, acquired intangibles with finite lives and other long-lived assets. Historically, there have been no significant changes in our estimates or assumptions that would have had a material impact for our goodwill or intangible assets impairment assessment. We believe our projected operating results and cash flows would need to be significantly less favorable to have a material impact on our impairment assessment. However, based upon our historical experience with operations, we do not believe there is a reasonable likelihood of a significant change in our projections.

Share-Based Compensation

We measure stock-based compensation cost at the grant date based on the fair value of the award and recognize it as expense, net of estimated forfeitures, over the vesting or service period, as applicable, of the stock award (generally three to four years). We use the Black-Scholes valuation model to determine the fair value of our stock options and a Monte Carlo valuation model to determine the fair value of our market share units. Our valuation models and generally accepted valuation techniques require us to make assumptions and to apply judgment to determine the fair value of our awards. These assumptions and judgments include estimating the volatility of our stock price, expected dividend yield, employee turnover rates and employee stock option exercise behaviors. Historically, there have been no material changes in our estimates or assumptions. We do not believe there is a reasonable likelihood there will be a material change in the future estimates or assumptions. See Note 13 to the accompanying consolidated financial statements for further discussion of our share-based employee benefit plans.

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.

On December 22, 2017, the Tax Act was enacted by the U.S. government. The Tax Act makes broad and complex changes to the U.S. tax code that affect our fiscal year ended September 30, 2019, including but not limited to: (1) creating the base erosion anti-abuse tax measure that taxes certain payments between a U.S. corporation and its foreign subsidiaries; (2) creating a new provision designed to tax global intangible low-tax income of foreign subsidiaries; and (3) a foreign derived intangible income. We have estimated the impact of these changes in our income tax provision for 2019.

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.

Contingencies and Litigation

We are subject to various proceedings, lawsuits and claims relating to products and services, technology, labor, stockholder and other matters. We are required to assess the likelihood of any adverse outcomes and the potential range of probable losses in these matters. If the potential loss is considered probable and the amount can be reasonably estimated, we accrue a liability for the estimated loss. If the potential loss is considered less than probable or the amount cannot be reasonably estimated, disclosure of the matter is considered. The amount of loss accrual or disclosure, if any, is determined after analysis of each matter, and is subject to adjustment if warranted by new developments or revised strategies. Due to uncertainties related to these matters, accruals or disclosures are based on the best information available at the time. Significant judgment is required in both the assessment of likelihood and in the determination of a range of potential losses. Revisions in the estimates of the potential liabilities could have a material impact on our consolidated financial position or consolidated results of operations. Historically, there have been no material changes in our estimates or assumptions. We do not believe there is a reasonable likelihood there will be a material change in the future estimates.

New Accounting Pronouncements

Recently Adopted Accounting Pronouncements

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09. The standard’s core principle is that a reporting entity will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. In addition, the standard requires disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from the contracts with customers. The guidance permits two methods of adoption: retrospectively to each prior reporting period presented (“full retrospective method”), or retrospectively with the cumulative effect of initially applying the guidance recognized at the date of initial application (“modified retrospective method”).

We adopted ASU 2014-09 in the first quarter of our fiscal 2019 using the full retrospective method which required us to adjust each prior reporting period presented. This adoption primarily affected 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 recognize revenue when control of the license is transferred to the customer, rather than at the date payments become due and payable when there are extended payment terms, or ratably over the term of the contract as required under the previous standard. In addition, revenue attributable to a software license renewal is recognized at the beginning of the applicable renewal period rather than at the signing of the renewal agreement as required under the previous standard. Additionally, under the new standard, when we enter into noncancellable contracts that provide unconditional rights to payment from our customers for services we have not yet completed or services we will provide in the near future, we present receivables—our unconditional rights to payments—and deferred revenues on a gross basis, rather than on a net basis. Finally, under the new standard we capitalize and amortize contract acquisition costs such as commissions paid for SaaS cloud services contracts in excess of one year. Following the adoption of ASU 2014-09, the revenue recognition for our other sales arrangements remained materially consistent with our historical practice.

Upon adoption of ASU 2014-09, we applied the standard’s practical expedients that permit the omission of prior-period information about our performance obligations.

See Note 1 to the accompanying consolidated financial statements for further discussion on the impact of the standard adoption on our previously reported results.

Recent Accounting Pronouncements Not Yet Adopted

In August 2018, the FASB issued ASU No. 2018-15, “Intangibles—Goodwill and Other (Topic 350): Internal-Use Software.” ASU 2018-15 aligns the requirements for capitalizing implementation costs incurred in a cloud computing arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. The standard is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2019, which means that it will be effective for our fiscal year beginning October 1, 2020. Early adoption is permitted. We are currently evaluating the impact of our pending adoption of ASU 2018-15 on our consolidated financial statements.

In June 2016, the FASB issued ASU No. 2016-13, “Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments” and subsequent amendments to the initial guidance: ASU 2018-19, ASU 2019-04 and ASU 2019-05 (collectively, “Topic 326”). Topic 326 requires measurement and recognition of expected credit losses for financial assets held. Topic 326 is effective for fiscal years and interim periods within those fiscal years beginning after December 15, 2019, which means it will be effective for our fiscal year beginning October 1, 2020. Early adoption is permitted. We are currently evaluating the impact of our pending adoption of Topic 326 on our consolidated financial statements.

In February 2016, the FASB issued ASU No. 2016-02, “Leases (Topic 842)” and subsequent amendments to the initial guidance: ASU 2017-13, ASU 2018-10, ASU 2018-11, ASU 2018-20 and ASU 2019-01 (collectively, “Topic 842”). Topic 842 requires companies to generally recognize on the balance sheet operating and financing lease liabilities and corresponding right-of-use assets. Topic 842 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 impact of our pending adoption of Topic 842 on our consolidated financial statements. We expect that most of our operating leases will be recognized as right-of-use assets and corresponding lease liabilities on our consolidated balance sheets, which will increase our total assets and total liabilities upon adoption. Subject to the completion of our assessment, we expect the adoption of the standard will result in recognition of right-of-use assets of approximately $90 million and lease liability of approximately $99 million in our consolidated balance sheets.

We do not expect that any other recently issued accounting pronouncements will have a significant effect on our financial statements.