Fair Isaac 10-K 2020-09-30

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

(Mark One)

For the fiscal year ended September 30, 2020

For the transition period from to

Commission File Number 1-11689

Fair Isaac Corp****oration

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code:

408**-**535-1500

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act:

None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☒ No ☐

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act:

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Act. ☐

Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

As of March 31, 2020, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was $7,095,692,430 based on the last transaction price as reported on the New York Stock Exchange on such date. This calculation does not reflect a determination that certain persons are affiliates of the registrant for any other purposes.

The number of shares of common stock outstanding on October 30, 2020 was 29,098,177 (excluding 59,758,606 shares held by the Company as treasury stock).

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant’s definitive proxy statement relating to its 2021 Annual Meeting of Stockholders (“2021 Proxy Statement”) are incorporated by reference into Part III of this Annual Report on Form 10-K where indicated. The 2021 Proxy Statement will be filed with the U.S. Securities and Exchange Commission within 120 days after the end of the fiscal year to which this report relates.

TABLE OF CONTENTS

FORWARD LOOKING STATEMENTS

Statements contained in this report that are not statements of historical fact should be considered forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (the “PSLRA”). In addition, certain statements in our future filings with the Securities and Exchange Commission (“SEC”), in press releases, and in oral and written statements made by us or with our approval that are not statements of historical fact constitute forward-looking statements within the meaning of the PSLRA. Examples of forward-looking statements include, but are not limited to: (i) projections of revenue, income or loss, expenses, earnings or loss per share, the payment or nonpayment of dividends, capital structure and other statements concerning future financial performance; (ii) statements of our plans and objectives by our management or Board of Directors, including those relating to products or services, research and development, and the sufficiency of capital resources; (iii) statements of assumptions underlying such statements, including those related to economic conditions; (iv) statements regarding results of business combinations; (v) statements regarding business relationships with vendors, customers or collaborators, including the proportion of revenues generated from international as opposed to domestic customers; and (vi) statements regarding products, their characteristics, performance, sales potential or effect in the hands of customers. Words such as “believes,” “anticipates,” “expects,” “intends,” “targeted,” “should,” “potential,” “goals,” “strategy,” “outlook,” “plan,” “estimated,” ”will,” variations of these terms and similar expressions are intended to identify forward-looking statements, but are not the exclusive means of identifying such statements. Forward-looking statements involve risks and uncertainties that may cause actual results to differ materially from those in such statements. Factors that could cause actual results to differ from those discussed in the forward-looking statements include, but are not limited to, those described in Item 1A of Part I, “Risk Factors,” below (including the impact of COVID-19 on macroeconomic conditions and our business, operations and personnel). The performance of our business and our securities may be adversely affected by these factors and by other factors common to other businesses and investments, or to the general economy. Forward-looking statements are qualified by some or all of these risk factors. Therefore, you should consider these risk factors with caution and form your own critical and independent conclusions about the likely effect of these risk factors on our future performance. Such forward-looking statements speak only as of the date on which statements are made, and we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which such statement is made to reflect the occurrence of unanticipated events or circumstances. Readers should carefully review the disclosures and the risk factors described in this and other documents we file from time to time with the SEC, including our Quarterly Reports on Forms 10-Q and Current Reports on Form 8-K to be filed by us in fiscal 2021*.*

PART I

GENERAL

Fair Isaac Corporation (NYSE: FICO) (together with its consolidated subsidiaries, the “Company,” which may also be referred to in this report as “we,” “us,” “our,” and “FICO”) provides products, solutions and services that enable businesses to automate, improve and connect decisions to enhance business performance. Our predictive analytics, which includes the industry-standard FICO® Score, and our decision management systems leverage the use of big data and mathematical algorithms to predict consumer behavior and power hundreds of billions of customer decisions each year.

We were founded in 1956 on the premise that data, used intelligently, can improve business decisions. Today, we help thousands of companies in over 120 countries use our decision management technology to target and acquire customers more efficiently, increase customer value, reduce fraud and credit losses, lower operating expenses, and enter new markets more profitably. Most leading banks and credit card issuers rely on our solutions, as do insurers, retailers, telecommunications providers, automotive companies, pharmaceutical companies, healthcare organizations, public agencies and organizations in other industries. We also serve consumers through online services that enable people to access and understand their FICO® Scores, the standard measure in the U.S. of consumer credit risk, empowering them to manage their financial health.

More information about us can be found on our website, www.fico.com. We make our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, as well as amendments to those reports, available free of charge through our website as soon as reasonably practicable after we electronically file them with the SEC. References to our website address in this report do not constitute an incorporation by reference. Information on our website is not part of this report.

PRODUCTS AND SERVICES

We use analytics to help businesses automate, improve and connect decisions across their enterprise, an approach we commonly refer to as decision management. Most of our solutions address customer engagement, including customer acquisition, customer onboarding, customer servicing and management, and customer protection. We also help businesses improve non-customer decisions such as transaction and claims processing. Our solutions enable users to make decisions that are more precise, consistent and agile, and that systematically advance business goals. This helps our clients reduce the cost of doing business and losses from risks and fraud, while helping increase revenues, profitability, and customer loyalty.

Our Segments

We categorize our products and services into the following three operating segments:

Our Solutions

Our solutions involve four fundamental disciplines:

All of our solutions are designed to help businesses make decisions that are faster, more precise, more consistent and more agile, while reducing costs and risks incurred in making decisions. In addition, we offer our clients a portfolio of applications, tools and services in the cloud, which allow them to create, customize, deploy and manage powerful analytic services.

Applications

We develop industry-tailored decision management applications, which apply analytics, data management and decision management software to specific business challenges and processes. Our applications primarily serve clients in the banking, insurance, telecommunications, healthcare, retail and public sectors. During fiscal 2020, we continued to expand our product offerings for the FICO® Analytic Cloud and AWS, resulting in increased sales opportunities by accommodating customers that can benefit from the power, flexibility and modularity of these solutions. Within our Applications segment our fraud solutions accounted for 15%, 18% and 17% of total revenues in each of fiscal 2020, 2019 and 2018, respectively, and our customer communication services accounted for 8%, 9% and 10% of total revenues in each of these periods, respectively.

Origination Applications

We provide solutions that enable banks, credit unions, finance companies, alternative peer-to-peer and online lenders, auto lenders, and other companies to automate and improve the processing of requests for credit or service. These solutions increase the speed and efficiency with which requests are handled, reduce losses, and increase approval rates through analytics that assess applicant risk and reduce the need for manual review by loan officers.

FICO® Origination Manager, an application-to-decision processing solution, is available both on-premises and in the FICO® Analytic Cloud, and we plan to make it available in the AWS cloud in fiscal 2021 with the launch of FICO® Origination Manager 5.0.

Other solutions include the web-based FICO® LiquidCredit® service, which is primarily focused on credit decisions and offered largely to mid-tier banking institutions. FICO® Small Business Scoring Service℠ (SBSS) is recognized as the industry leader in assessing the risk of U.S. small business credit applicants. SBSS is delivered via our LiquidCredit service infrastructure and it brings the speed of consumer lending to small business lending decisions. With SBSS, clients can typically make decisions in hours rather than days to improve customer satisfaction and help attract more small businesses.

Delivered as a cloud service, FICO® Origination Manager Essentials offers mid-market organizations the ability to inexpensively set up and process small business applications quickly, without a long or difficult implementation process. Origination Manager Essentials will be phased out in August 2021.

To support origination, we also offer custom and consortium-based credit risk and application fraud models.

Customer Management Applications

Our customer portfolio management products and services enable businesses to automate and improve risk-based decisions for their existing customers. These solutions help businesses apply advanced analytics in account and customer decisions to increase portfolio revenue, decrease risk exposure and losses, and reduce customer attrition, while improving operational efficiencies.

We provide customer portfolio management solutions for banking, telecommunications and retail. FICO® TRIAD® Customer Manager, a leading credit management system, is available both on-premises and in the FICO® Analytic Cloud. FICO® Strategy Director is the newest, more flexible customer management application available on the FICO Analytic Cloud and AWS. These solutions enable businesses to rapidly adapt to changing business and internal conditions by designing and testing new strategies in a “champion/challenger” environment. The current versions enable users to manage risk and communications at both the account and customer level from a single platform.

We market and sell FICO® TRIAD® Customer Manager and FICO® Strategy Director software licenses, maintenance, consulting services, and strategy design and evaluation. Additionally, we provide TRIAD and Strategy Director services and similar credit account management services through third-party credit card processors worldwide, including two of the largest processors in the U.S.

Fraud Protection and Compliance Applications

Our fraud protection and compliance products improve our clients’ profitability by providing protections across the customer lifecycle from account origination to digital customer interactions—such as online or mobile logins—to non-monetary transactions—such as address changes or pin changes—to payment transactions. Our fraud and financial crimes solutions analyze activity in real time and generate recommendations for immediate action. These defenses are critical to stopping synthetic identity fraud, first-party fraud, and third-party fraud, as well as identifying money laundering activity to help our clients stay compliant and secure while safeguarding the customer experience.

Our fraud solutions are designed to detect and prevent a wide variety of risk types. By looking across products and channels—including real-time payments, peer-to-peer transactions, digital payments, card payments (credit, debit, prepaid), and deposits—FICO helps financial institutions reduce losses and damaged customer relationships caused by fraud and related criminal behavior. FICO fraud solutions also help protect retailers, insurance companies and government agencies.

Our leading fraud detection solution is the FICO® Falcon® Platform, which is recognized as a global leader in fraud detection. The Falcon Platform examines transactional, account, customer, device and merchant data to detect a wide range of fraud indicators quickly and accurately by utilizing artificial intelligence technology. It analyzes transactions in real time, assesses the risk of fraud in a fraud score, and provides the ability for user-defined variables and rules strategies to be used in conjunction with the fraud score to prevent fraud while expediting legitimate transactions. Adaptive analytics, a form of self-learning models, can also be employed to accelerate our customers’ response to evolving fraud tactics.

FICO® Fraud Predictor with Merchant Profiles is used in conjunction with the FICO® Falcon® Platform to improve fraud detection rates through the inclusion of merchant profiles, which is especially important for online transactions. Merchant profiles are built using fraud and transactional data that include characteristics revealing which merchants have a history of higher fraud volumes, and which purchase types and ticket sizes have most often been fraudulent at a particular merchant, among others.

FICO® Falcon® Compromise Manager is used in conjunction with the FICO® Falcon® Platform to identify point-of-sale and e-commerce card compromises with analytically derived recommended actions—such as card block and reissue, or watch-listing—to optimize loss prevention. Separately, the FICO® Card Alert Service prevents ATM debit fraud by identifying counterfeit or compromised payment cards and reporting them to issuers. The service analyzes daily transactions from participating networks and uses this data to identify common points of compromise and suspect cards most likely to incur fraud.

We offer a wide range of solutions focused on preventing and detecting identity fraud. In August 2019, we introduced our identity proofing and user authentication solutions, FICO® Falcon® Identity Proofing and FICO® Falcon® Authentication Suite. Identity proofing is the digital process of onboarding new customers without requiring face-to-face verification. The technology provides an extra layer of security that is easy to use with minimal customer inconvenience, thereby preventing fraud as well as ensuring regulatory compliance standards such as e-KYC are met. User authentication is the real-time corroboration of an identity previously established to enable access to an electronic or digital asset. As an authentication hub, our technology includes multifactor, biometric, and behavioral (user and device-based) capabilities. By bringing digital identity verification into our broader portfolio, we give our clients the ability to strengthen fraud and financial crimes defenses with more contextual data and decisioning.

FICO® Application Fraud Manager helps businesses prevent both first- and third-party fraud during the application process. By preventing fraud prior to account origination, we help our customers avoid future losses as well as unnecessary collections costs. FICO® Identity Resolution Engine helps organizations detect and investigate organized criminal behavior using graph analytics to identify entities and their connections across federated data sources.

We also offer a comprehensive modular set of compliance solutions to fight money-laundering, terrorist financing, and to fulfill custom requirements for governance, risk and compliance. Solutions include, but are not limited to, Know Your Customer (“KYC”), Anti-Money Laundering (“AML”), and Sanctions Screening.

In September 2019, FICO introduced FICO® Falcon® X, a unified platform for the detection and investigation of both fraud and financial crimes. We also announced FICO® Analytics Workbench™—Falcon Edition, which allows banks’ data science teams to develop machine learning models using open source libraries, as well as FICO machine learning libraries, and then deploy the models on Falcon X for operational use.

Prior to October 2020, when we divested this business, the FICO® Cyber Risk Score was part of the FICO® Enterprise Security Suite and it provided an empirically derived score that conveyed the security posture of an organization and the likelihood of a material data breach in the following twelve months. The score was used by customers to manage the cyber risk of an enterprise, assess third-party risk that may be introduced by third- and fourth-party partners and suppliers, and provide an effective tool for cyber insurance underwriting.

Collections & Recovery Applications

FICO® Debt Manager™, FICO® Debt Manager™ Pro, FICO® Debt Manager™ Pro Plus, FICO® PlacementsPlus® service, FICO® Network and FICO® Placement OptimizerSM solution (collectively, the “FICO Debt Management Solutions”) automate the full cycle of collections and recovery, including early collections, late collections, asset disposal, agency placement and optimization, recovery, litigation, bankruptcy, asset management and residual balance recovery. PlacementsPlus service facilitates control over the distribution and management of accounts to agencies, attorneys, debt buyers and internal recovery departments. FICO Network provides creditors with a single, secure and compliant channel to exchange data with collection agencies, credit bureaus, debt buyers, attorneys, and other vendors. Placement Optimizer maximizes the effectiveness of the placement strategy once accounts are outsourced. FICO Debt Management Solutions also include assessments, models and scores, predictive analytics, advanced customer engagement and optimization. FICO® Debt Manager™ is available both on premises and in the FICO® Analytic Cloud.

Customer Communication Services

FICO® Customer Communication Services is an intelligent omnichannel digital communication manager for executing customer lifecycle decisions. It enables businesses to automate individualized dialogues with the consistency and regulatory compliance of their human agents. With Customer Communication Services, businesses can be available 24/7 for one-way or two-way communication through any channel consumers choose. Customers can rapidly launch mobile alerts, messaging, virtual agents, self-service options and other auto-resolution capabilities. It helps make the full customer journey—account origination and onboarding, customer management account notifications and engagement campaigns, fraud management and debt collection—more digital and raises the level of data-driven intelligence behind lifecycle communications. In addition to its own rules-based communication logic and embedded rules engine, Customer Communication Services can execute complex multi-step strategies shaped by risk-based segmentation, predictive scores, machine learning insights and mathematical optimization.

Marketing Applications

FICO® Marketing Solutions Suite is made up of products, capabilities and services designed to integrate the technology and analytic services needed to perform context-sensitive customer acquisition, cross-selling and retention programs and deliver mathematically optimized offers. The Marketing Solutions Suite enables companies that offer multiple products and use multiple channels (companies such as large financial institutions, consumer branded goods companies, pharmaceutical companies, retail merchants and hospitality companies) to execute more efficient and profitable customer interactions. Services offered in our marketing solutions include customer data integration services; services that enable real-time marketing through direct consumer interaction channels; campaign management, messaging and optimization services; interactive tools that automate the design, execution and collection of customer response data across multiple channels; and customer data collection, management and profiling services.

Analytic Services

We perform custom analytics (descriptive, predictive and prescriptive) as well as decision modeling and related analytic and machine learning projects for clients in multiple industries. This enables them to improve critical business processes and operationalize analytics across the customer lifecycle. We do so with our advanced analytic methodologies and domain expertise to solve risk management, fraud, marketing and other challenges for a single business, using that business’s unique data and industry position to develop a highly customized solution. Most of this work falls under predictive analytics, decision modeling and optimization, which provide greater insight into customer preferences, predict future customer behavior and operationalize these analytics. Within decision analysis and optimization, we apply data and proprietary algorithms to design customer treatment strategies and improve business outcomes.

Scores

Our FICO® Scores are used in the majority of U.S. credit decisions, by nearly all of the major banks, credit card organizations, mortgage lenders and auto loan originators. These credit scores, developed based on third-party data, provide a consistent and objective measure of an individual’s credit risk. Credit grantors use our FICO® Scores in a variety of ways: to prescreen candidates for marketing programs; to evaluate applicants for new credit; and to manage existing customer accounts. FICO® Score is a three-digit score ranging from 300-850. They are calculated by running data from the three U.S. national credit reporting agencies, Experian, TransUnion and Equifax, through one of several proprietary scoring models developed by FICO. Lenders generally pay the credit reporting agencies scoring fees based on usage, and the credit reporting agencies pay an associated fee to us. FICO® Score 10 and FICO® Score 10 T, the most recent versions of the FICO® Score, are anticipated to be released at the three U.S. national credit reporting agencies by the end of calendar year 2020.

While the core FICO® Score is the foundation of our scoring portfolio, we offer a number of other broad-based scores, including several specific FICO® Industry Scores. We also develop various custom scores for our financial services clients. Additionally, we continue to innovate by investing in the development of scores that can help expand the scorable population using alternative credit data. FICO**®** Score XD looks at public records and property data, and a consumer’s history with mobile, landline phone and cable payments, to generate scores on the same 300-850 scale as standard FICO**®** Scores. FICO**®** Score XD is available to lenders from LexisNexis Risk Solutions and Equifax. The UltraFICO™ Score considers consumer permissioned data from accounts such as checking, savings, or money market accounts. Incorporating consumer contributed data is a unique approach to helping empower consumers to establish or improve their creditworthiness by using data that reflects sound financial activity but that is not part of a traditional credit report. This can help consumers qualify for the credit they seek under more competitive terms. This approach is particularly helpful for consumers who may have very sparse or inactive credit files and are seeking a path toward greater financial inclusion in mainstream banking.

Outside the U.S., we offer FICO® Scores, including scores using alternative data, for consumers, and in some cases for small and medium enterprises, through credit reporting agencies. We also have installed client-specific versions of the FICO® Score in over ten countries. Like FICO**®** Scores in the U.S., these scores help lenders in multiple countries leverage the FICO**®** Score’s predictive analysis to assess the risk of marketing prospects and credit applicants. FICO**®** Scores are in use or being implemented in 30 different countries across five continents outside the U.S.

We also have scoring systems for insurance underwriters and marketers. Our FICO® Insurance Scores use the same underlying statistical technology as our FICO® Scores, but are designed to predict future personal auto and homeowner insurance losses for new applicants and existing policyholders. Our insurance scores are available to the insurance industry throughout the U.S.

During fiscal 2020, we announced the launch of the FICO® Resilience Index, a new analytic tool designed to complement FICO® Score models by identifying those consumers who are most resilient to economic stress relative to other consumers within the same FICO® Score bands. FICO® Resilience Index would enable industry participants to more precisely assess credit risk and extend credit to more consumers throughout the economic cycle by managing the risk that emerges during periods of economic stress.

We also provide FICO® Score based products, education and information on FICO® Scores to consumers. They are distributed directly by us through our myFICO® service and through licensed distribution partners, including Experian and certain lenders, for use in customer and non-customer programs.

The myFICO® products and subscription offerings are available online at www.myfico.com. Consumers can use the myFICO.com website to purchase their FICO® Scores, including credit reports associated with the scores, explanations of the factors affecting their scores, and customized information on how to manage their scores. We make available the 28 most widely used versions of the FICO® Score from the three major U.S. credit bureaus through our myFICO® service, representing approximately 95% of all FICO® Scores sold and used by lenders. Customers can use products to simulate how taking specific actions could affect their FICO® Score 8. Consumers can also subscribe to monitoring services, which deliver alerts via email and text when changes to a user’s FICO® Scores or other credit report content are detected. In addition, consumers can purchase identity theft monitoring products that alert consumers of potential risks of identity fraud with comprehensive detection and identity restoration services.

Decision Management Software

We provide an analytics and decision management platform that businesses use to build their own tailored, analytically-powered decision management applications. The FICO® Decision Management Platform adds scalable and flexible decision management capabilities to virtually any application or operational system. Together, these tools are sold as licensed software or as a SaaS offering in the cloud, and can be used standalone, or in conjunction with third-party solutions, to advance a client’s decision management initiatives. We use these tools as foundational components for our own decision management solutions, described above in the “Applications” section, enhancing the cross-compatibility and extensibility of all of the software solutions we build and deliver. We also partner with third-party providers within given industry markets and with major software companies to embed our tools and other FICO Decision Management Platform components within their existing applications.

During fiscal 2020, FICO continued to enhance the FICO® Decision Management Platform and related services for building, extending, deploying and scaling decision management applications and solutions. These services are collectively referred to as the FICO® Decision Management Suite, and include capabilities for authoring, customizing, executing, and managing predictive analytic, decisioning, and optimization components and services; developing, orchestrating and publishing analytics-powered applications; and visualizing, analyzing and reporting data trends. Component capabilities include:

The FICO® Decision Management Suite enables FICO’s clients to combine big data, predictive analytics and decision execution together in an easy-to-use, integrated development and deployment environment. It enables organizations to rapidly create innovative analytic applications; dramatically increase developer and business user productivity with support for a broad range of analytic and decision tools; and execute decisions in real time. It also empowers business analysts and other domain experts to modify systems without IT involvement, providing organizations with the agility they need to rapidly respond to customer, regulatory and business changes.

In addition, FICO offers certain decision management software tools for use outside of the context of the FICO Decision Management Platform, including:

Rules Management. The FICO® Blaze Advisor® decision rules management system is used to design, develop, execute and maintain rules-based business applications. The Blaze Advisor system enables business users to propose and preview the impact of changes to decisioning logic, to review and approve proposed changes, and to commit those changes to production decisioning, all without demanding IT cycles. The Blaze Advisor system is sold as an end-user tool and is also the rules engine within several of our decision management applications. The Blaze Advisor system, available in six languages, is a multi-platform solution that: embeds rules management within existing applications; supports Web Services and service-oriented architecture, Java 2 Enterprise Edition platforms, and COBOL for z/OS mainframes; and is the first rules engine to support Java and COBOL deployment of the same rules. It also incorporates the exclusive Rete III rules execution technology, which improves the efficiency and speed with which the Blaze Advisor system is able to process and execute complex, high-volume decision rules.

Predictive Modeling. FICO® Decision Central™ is a comprehensive offering to help banks and other organizations-including insurance, retail and health care companies-streamline their predictive and decision model governance and meet stricter regulations for model management. It complements FICO® Analytics Workbench™, which enables the user to develop and deploy sophisticated predictive models for use in automated decisions. This software is based on the methodology and tools FICO uses to build both client-level and industry-level predictive models, which it developed from countless client engagements. The predictive models and strategies produced can be embedded in custom production applications, the FICO® Platform, or one of our decision management applications. FICO® Analytics Workbench is available for on-premises or cloud implementation.

Optimization. FICO® Xpress Optimization provides operations research professionals with world-class solvers and high-productivity tools to quickly design and deliver custom, mathematically optimal solutions for a wide range of industry problems. Xpress includes a powerful modeling and programming language, with robust scalability, to quickly model and solve even the largest optimization problems. Xpress tools are licensed to end users, consultants and independent software vendors in several industries, and are a core component within FICO® Decision Optimizer. Decision Optimizer is a software tool that enables complex, large-scale optimizations involving dozens of networked action-effect models, and enables exploration and simulation of many optimized scenarios along an efficient frontier of options. The data-driven strategies produced by these tools can be executed by the FICO® Blaze Advisor® system or one of our Decision Management applications. FICO’s solution for creating or executing optimization solutions is available on-premises or in the cloud.

COMPETITION

The market for our advanced solutions is intensely competitive and is constantly changing. Our competitors vary in size and in the scope of the products and services they offer. We encounter competition from a number of sources, including:

We believe our competitors are presently unable to provide the mix of products, expertise in predictive analytics and integration with decision management software, and enhanced customer management capabilities that we are able to deliver. However, certain competitors may have larger shares of particular geographic or product markets than we do.

Applications

The competition for our Applications varies by both application and industry.

In the marketing services market, we compete with Pegasystems, Equifax, Experian, SAS, Adobe and Salesforce, among others. We also compete with traditional advertising agencies and companies’ internal information technology and analytics departments.

In the customer origination market, we compete with Experian, Equifax, Moody’s, Meridian Link, and CGI, among others.

In the customer strategy management market, we compete with Experian and SAS, among others.

In the fraud and financial crimes market for banking, we compete primarily with Nice Actimize, Experian, BAE Systems Applied Intelligence, SAS, ACI Worldwide, IBM, Feedzai and Featurespace.

In the collections and recovery market, we compete with both outside suppliers and in-house scoring and computer systems departments for software and ASP servicing. Major competitors include CGI, the three major U.S. credit reporting agencies and various boutique firms.

Scores

In this segment, we compete with both outside suppliers and in-house analytics departments for scoring business. Primary competitors among outside suppliers of scoring models are the three major credit reporting agencies in the U.S. and Canada, which are also our partners in offering our scoring solutions, and VantageScore (a joint venture entity established by the major U.S. credit reporting agencies). Additional competitors include CRIF and other credit reporting agencies outside the U.S., and other data providers like LexisNexis and ChoicePoint, some of which also are among our partners.

For our “direct-to-consumer” services that deliver credit scores, credit reports and consumer credit education services, we compete with other direct to consumer credit and identity services.

Decision Management Software

Our primary competitors in this segment include IBM, Experian, SAS, Pegasystems and Gurobi, along with a number of smaller, specialized vendors providing industry-specific solutions.

Competitive Factors

We believe the principal competitive factors affecting our markets include: technical performance; access to unique proprietary databases; availability in SaaS format; product attributes like adaptability, scalability, interoperability, functionality and ease-of-use; product price; customer service and support; the effectiveness of sales and marketing efforts; existing market penetration; and reputation. Although we believe our products and services compete favorably with respect to these factors, we may not be able to maintain our competitive position against current and future competitors.

MARKETS AND CUSTOMERS

Our products and services serve clients in multiple industries, including primarily banking, insurance, retail, healthcare and public agencies. End users of our products include 96 of the 100 largest financial institutions in the U.S., and two-thirds of the largest 100 banks in the world. Our clients also include more than 600 insurers, including nine of the top ten U.S. property and casualty insurers; more than 300 retailers and general merchandisers; more than 200 government or public agencies; and more than 200 healthcare and pharmaceuticals companies, including nine of the world’s top ten pharmaceuticals companies. Eight of the top ten companies on the 2020 Fortune 500 list use one or more of our solutions. In addition, our consumer services are marketed to an estimated 200 million U.S. consumers whose credit relationships are reported to the three major U.S. credit reporting agencies.

In the U.S., we market our products and services primarily through our own direct sales organization that is organized around vertical markets. Sales groups are based in our headquarters and in field offices strategically located both in and outside the U.S. We also market our products through indirect channels, including alliance partners and other resellers.

Our scores are marketed and sold through credit reporting agencies. During fiscal 2020, 2019 and 2018, revenues generated from our agreements with Experian, TransUnion and Equifax collectively accounted for 32%, 29% and 25% of our total revenues, respectively.

Outside the U.S., we market our products and services primarily through our subsidiary sales organizations. Our subsidiaries license and support our products in their local countries as well as within other foreign countries where we do not operate through a direct sales subsidiary. We also market our products through resellers and independent distributors in international territories not covered by our subsidiaries’ direct sales organizations.

Our largest market segments outside the U.S. are the United Kingdom and Canada. In addition, we have delivered products to users in more than 120 countries.

TECHNOLOGY

We specialize in analytics software and decision management technologies that analyze data and drive decision strategies and customer engagement. We maintain active research in a number of fields for the purposes of deriving greater insight and predictive value from data, making various forms of data more usable and valuable to the model-building process, and automating and applying analytics to the various business processes involved in making high-volume decisions in real time.

We are widely recognized as a leader in predictive analytics due to our pioneering work in credit scoring and fraud detection. We believe that our tools and processes are among the very best commercially available, and that we are uniquely able to integrate advanced analytic, software and data technologies into mission-critical business solutions that offer superior returns on investment.

In fiscal 2020, we continued to make progress with our FICO® Decision Management Suite and FICO® Decision Management Platform initiatives. Most significantly for the fiscal year, we added new Platform Service functionality to provide cross-application enablement of centralized services (for example, enabling authentication, provisioning, data ingestion, and similar functions). We have seen initial success in delivering platform-centric solutions that provide unique value to enterprise clients in tracking and visualizing a buyer’s journey across otherwise siloed offerings.

In addition, we continue to expand the integration of capabilities that make many of our software solutions, which were previously available only as on-premises software installations, into SaaS solutions hosted on the FICO® Analytic Cloud and/or in AWS. The FICO® Decision Management Suite enables clients to use FICO tools, along with rapid application development tools and visualization tools, to quickly develop their own decision management applications and services. We continue to add functionality to the platform as well as host additional FICO applications in the cloud. These ongoing initiatives are driven by enhancing our core technical capabilities listed below, and extending them through partnerships with other technology providers as well as through employing open source software.

Principal Areas of Expertise

Predictive Modeling. Predictive modeling identifies and mathematically represents underlying relationships in historical data in order to explain the data and make predictions or classifications about future events. Our models summarize large quantities of data to amplify its value. Predictive models typically analyze current and historical data on individuals to produce easily understood metrics such as scores. These scores rank-order individuals by likely future performance, e.g., their likelihood of making credit payments on time, or of responding to a particular offer for services. We also include in this category models that detect the likelihood of a transaction being fraudulent. Our predictive models are frequently operationalized in mission-critical transactional systems and drive decisions and actions in near real time. A number of analytic methodologies underlie our products in this area. These include proprietary applications of both linear and nonlinear mathematical programming algorithms, in which one objective is optimized within a set of constraints, and advanced neural systems, which learn complex patterns from large data sets to predict the probability that a new individual will exhibit certain behaviors of business interest. We also apply various related statistical techniques for analysis and pattern detection within large datasets, and have enhanced our abilities to derive insights and predictive variables from various forms of so-called big data, including unstructured data, such as text. We have enhanced our predictive analytic capabilities to include the development of machine learning algorithms and artificial intelligence. FICO has focused on making artificial intelligence explainable to auditors, developers and decision makers so that it can be deployed responsibly.

Decision Analysis and Optimization. Decision analysis refers to the broad quantitative field that deals with modeling, analyzing and optimizing decisions made by individuals, groups and organizations. Whereas predictive models analyze multiple aspects of individual behavior to forecast future behavior, decision analysis analyzes multiple aspects of a given decision to identify the most effective action to take to reach a desired result. We have developed an integrated approach to decision analysis that incorporates the development of a decision model that mathematically maps the entire decision structure; proprietary optimization technology that identifies the most effective strategies, given both the performance objective and constraints; the development of designed testing required for active, continuous learning; and the robust extrapolation of an optimized strategy to a wider set of scenarios than historically encountered. Our optimization capabilities also include a proprietary mathematical modeling and programming language, an easy-to-use development environment, and a state-of-the-art set of optimization algorithms.

Transaction Profiling. Transaction profiling is a patent-protected technique used to extract meaningful information and reduce the complexity of transaction data used in modeling. Many of our products operate using transactional data, such as credit card purchase transactions, or other types of data that change over time. In its raw form, this data is very difficult to use in predictive models for several reasons. First, an isolated transaction contains very little information about the behavior of the individual who generated the transaction. In addition, transaction patterns change rapidly over time. Finally, this type of data can often be highly complex. To overcome these issues, we have developed a set of techniques that transform raw transactional data into a mathematical representation that reveals latent information, and which make the data more usable by predictive models. This profiling technology accumulates data across multiple transactions of many types to create and update profiles of transaction patterns. These profiles enable our neural network models to efficiently and effectively make accurate assessments of, for example, fraud risk and credit risk within real-time transaction streams.

Customer Data Integration. Decisions made on customers or prospects can benefit from data stored in multiple sources, both inside and outside the enterprise. We have focused on developing data integration processes that are able to assemble and integrate those disparate data sources into a unified view of the customer or household, through the application of persistent keying technology. This data can include structured or unstructured data. Recent innovations include a solution that can integrate multiple data sources in real time and make them available for analysis and decisions.

Decision Management Software. In order to make a decision strategy operational, various steps and rules need to be programmed or exported into the business's software infrastructure, where they can communicate with front-end, customer-facing systems and back-end systems such as billing systems. We have developed software systems, sometimes known as decision engines and decision rules management systems, which perform the necessary functions to execute a decision strategy. Our software includes very efficient programs for these functions, facilitating, for example, business user definition of extremely complex decision strategies using graphical user interfaces; simultaneous testing of hundreds of decision strategies in “champion/challenger” (test/control) mode; high-volume processing and analysis of transactions in real time; integration of multiple data sources; and execution of predictive models for improved behavior forecasts and finer segmentation. Decision management software is an integral part of our decision management applications, described earlier.

Customer Engagement. We have advanced technology for customer engagement, which enables the execution of decisions and customer contact through SMS, email, automated voice, mobile applications and other channels. This technology enables FICO to extend decision management beyond the rendering of the decision to the final resolution with a customer, using the most effective method of communication for a given event and customer. Integrating this technology with our decision management systems has proven to decrease costs, improve staff efficiency, increase customer satisfaction and improve the return from marketing, fraud and collections activities.

Network Analytics. We have advanced technology for identity resolution and network analysis, which enables users to understand the relationships between their organization, customers, events, and third-party actors. Businesses can perform real-time searches across their enterprise data to find, match, and link similar entities and uncover hidden relationships between people, places and things. This technology complements FICO’s capabilities in the area of fraud and financial crime analytics.

Identity and Authentication. We have advanced technology for digital identity verification and authentication. As part of a unified digital identity suite, this technology provides a mobile and seamless method for validating identities during the customer onboarding process, and enrolling them as trusted entities for multifactor, biometric and behavioral authentication across digital interactions. It also helps organizations take a balanced approach to security and the user experience, providing easy-to-use, integrated security across the customer lifecycle.

PRODUCT PROTECTION AND TRADEMARKS

We rely on a combination of patent, copyright, trademark and trade secret laws and confidentiality agreements and procedures to protect our proprietary rights.

We retain the title to and protect the suite of models and software used to develop scoring models as a trade secret. We also restrict access to our source code and limit access to and distribution of our software, documentation and other proprietary information. We have generally relied upon the laws protecting trade secrets and upon contractual nondisclosure safeguards and restrictions on transferability to protect our software and proprietary interests in our product and service methodology and know-how. Our confidentiality procedures include invention assignment and proprietary information agreements with our employees and independent contractors, and nondisclosure agreements with our distributors, strategic partners and customers. We also claim copyright protection for certain proprietary software and documentation.

We have patents on many of our technologies and have patent applications pending on other technologies. The patents we hold may not be upheld as valid and may not prevent the development of competitive products. In addition, patents may never be issued on our pending patent applications or on any future applications that we may submit. We currently hold 184 U.S. and 16 foreign patents with 102 applications pending.

Despite our precautions, it may be possible for competitors or users to copy or reproduce aspects of our software or to obtain information that we regard as trade secrets. In addition, the laws of some foreign countries do not protect proprietary rights to the same extent as do the laws of the U.S. Patents and other protections for our intellectual property are important, but we believe our success and growth will depend principally on such factors as the knowledge, ability, experience and creative skills of our personnel, new products, frequent product enhancements and name recognition.

We have developed technologies for research projects conducted under agreements with various U.S. government agencies or their subcontractors. Although we have acquired commercial rights to these technologies, the U.S. government typically retains ownership of intellectual property rights and licenses in the technologies that we develop under these contracts. In some cases, the U.S. government can terminate our rights to these technologies if we fail to commercialize them on a timely basis. In addition, under U.S. government contracts, the government may make the results of our research public, which could limit our competitive advantage with respect to future products based on funded research.

We have used, registered and/or applied to register certain trademarks and service marks for our technologies, products and services. We currently have 34 trademarks registered in the U.S. and select foreign countries.

PERSONNEL

As of September 30, 2020, we employed 4,003 persons worldwide. Of these, 175 full-time employees were located in our San Jose, California office, 404 full-time employees were located in our San Diego, California office, 170 full-time employees were located in our Roseville, Minnesota office, 166 full-time employees were located in our San Rafael, California office, 129 full-time employees were located in our Fairfax, Virginia office, 1,178 full-time employees were located in our India-based offices and 379 full-time employees were located in our United Kingdom-based offices. None of our employees are covered by a collective bargaining agreement other than to the extent mandated by applicable law in certain foreign jurisdictions, and no work stoppages were experienced during fiscal 2020.

Information regarding our executive officers is included in Item 10, Directors, Executive Officers and Corporate Governance, of this Annual Report on Form 10-K.

Business, Market and Strategy Risks

The effects of the COVID-19 pandemic have negatively affected how we and our customers are operating our businesses. The duration of these effects, and the extent to which they will impact our future revenues, results of operations and overall financial performance, remain uncertain.

The COVID-19 pandemic has resulted in a widespread health crisis that has adversely affected the global economy, leading to reduced consumer spending and lending activities and disruptions and volatility in the global capital markets. COVID-19 has caused shutdowns to businesses and cities worldwide and has disrupted supply chains, business operations, travel, and consumer confidence.

As a result of the COVID-19 pandemic, we have temporarily closed the majority of our offices (including our corporate headquarters in the United States) and implemented travel restrictions, both of which have disrupted how we operate our business. Due in part to anticipated post-pandemic workforce patterns, we have permanently closed certain non-core offices, reduced certain other office space and reduced our global workforce. Our operations may be further negatively affected by a range of external factors related to the COVID-19 pandemic that are not within our control. For example, many cities, counties, states, and countries may continue to impose a wide range of restrictions on our employees’, partners’ and customers’ physical movement to limit the spread of COVID-19. We have postponed, canceled or shifted certain of our customer, employee or industry events to virtual-only experiences and may continue to do so in the future. If the COVID-19 pandemic has a substantial impact on our employees’, partners’ or customers’ productivity or ability to collaborate, our results of operations and overall financial performance may be harmed.

The situation surrounding the COVID-19 pandemic is constantly evolving and both the short-term and long-term effects remain unknown. Our customers, and therefore our business and revenues, are sensitive to negative changes in general economic conditions and lending activities. The COVID-19 pandemic may affect the rate of spending on our solutions and could adversely affect our customers’ ability or willingness to purchase our products and services, cause prospective customers to change product selections or term commitments, delay or cancel their purchasing decisions, extend sales cycles, and potentially increase payment defaults, all of which could adversely affect our future revenues, results of operations and overall financial performance. We have seen evidence that COVID-19 has adversely affected certain segments and originations volume, which may impact future revenue. We are unable to accurately predict the complete impact that COVID-19 will have on our future results of operations, financial condition, liquidity and cash flows due to numerous uncertainties, including the severity and transmission rate of the virus, the duration of the outbreak, the extent and effectiveness of containment actions, the effectiveness of any medical treatment and prevention options, and the impact of these and other factors on us, our employees, customers, partners and vendors, and on worldwide and U.S. economic conditions. If we are not able to respond to and manage these impacts effectively, our business may be harmed to a material extent.

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

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

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

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

Our revenues depend, to a great extent, upon conditions in the banking (including consumer credit) industry. If our clients’ industry experiences uncertainty, it will likely harm our business, financial condition or results of operations.

During fiscal 2020, 86% of our revenues were derived from sales of products and services to the banking industry. Periods of global economic uncertainty experienced in the past have produced substantial stress, volatility, illiquidity and disruption of global credit and other financial markets, resulting in the bankruptcy or acquisition of, or government assistance to, several major domestic and international financial institutions. The potential for future stress and disruptions, including in connection with the COVID-19 pandemic, presents considerable risks to our businesses and operations. These risks include potential bankruptcies or credit deterioration of financial institutions, many of which are our customers. Such disruption would result in a decline in the revenue we receive from financial and other institutions. In addition, if consumer demand for financial services and products and the number of credit applications decreas

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Not applicable.

Our properties consist primarily of leased office facilities for sales, data processing, research and development, consulting and administrative personnel. Our principal locations include:

In addition, we lease an aggregate of approximately 235,000 square feet of office and data center space in a number of smaller domestic locations and internationally in the United Kingdom, China, Singapore, and several other locations. We believe that suitable additional space will be available to accommodate future needs. See Note 17 to the accompanying consolidated financial statements for information regarding our obligations under leases.

On March 13, 2020, we received a letter from the Antitrust Division of the U.S. Department of Justice (“DOJ”) informing us that the DOJ had opened a civil investigation into potential exclusionary conduct by the Company. We are cooperating with the DOJ in its investigation.

Not Applicable.

PART II

Market Information

Our common stock trades on the New York Stock Exchange under the symbol: FICO. According to records of our transfer agent, at October 30, 2020, we had 278 stockholders of record of our common stock.

Unregistered Sales of Equity Securities and Use of Proceeds

Not applicable.

Issuer Purchases of Equity Securities

Performance Graph

The following graph shows the total stockholder return of an investment of $100 in cash on September 30, 2015, in (a) the Company’s common stock, (b) the Standard & Poor’s 500 Stock Index and (c) the Standard & Poor’s 500 Application Software Index, in each case with reinvestment of dividends. Our past performance may not be indicative of future performance.

We acquired TONBELLER Aktiengesellschaft in January 2015, QuadMetrics, Inc. in May 2016, and eZmCom, Inc. in August 2019. Results of operations from the acquisitions are included prospectively from their respective acquisition dates and did not materially impact comparability of the data presented below.

(1) Results of operations for fiscal years 2020 and 2017 included pre-tax charges of $45.0 million and $4.5 million, respectively, in restructuring and impairment charges.

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 2020, we continued to advance our cloud-enabled, platform-based strategy in our Applications and Decision Management Software segments. The application of this strategy has led to an increase in our cloud bookings over the past several years. Our cloud bookings accounted for 41% of our total bookings in fiscal 2020, compared to 39% during fiscal 2019. We have invested, and intend to continue to invest, in product development to build out and deliver features, functionalities and performance enhancements using a SaaS-based approach on our platform. Our continued product innovation provides growth opportunities with customers that can benefit from the power, flexibility and modularity of these solutions.

For our Scores segment, our industry leading business-to-business FICO® Scores have achieved a multi-year expansion in the growing U.S. business-to-consumer market. We have launched numerous new FICO® Score-based products, and continue to grow our business-to-consumer 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 240 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. During fiscal 2020, we announced the launch of the FICO® Resilience Index, a new analytic tool designed to complement FICO® Score models by identifying those consumers who are most resilient to economic stress relative to other consumers within the same FICO® Score bands. FICO® Resilience Index would enable industry participants to more precisely assess credit risk and extend credit to more consumers throughout the economic cycle by managing the risk that emerges during periods of economic stress.

We also continue to enhance stockholder value by returning cash to stockholders through our stock repurchase program. During fiscal 2020, we repurchased approximately 0.7 million shares at a total repurchase price of $235.2 million. As of September 30, 2020, we had $224.8 million remaining under our current stock repurchase program.

As a strategic cost initiative in fiscal 2020, we committed to a course of action designed to reduce operating costs in lower value, less strategic areas of our business in order to facilitate incremental investment in higher value, more strategic areas while also reducing our facilities footprint in light of post-pandemic workforce patterns. As a result of this initiative, in the fourth quarter of fiscal 2020, we recorded a net charge of $41.9 million consisting of impairment losses of $33.2 million on our operating lease assets, property and equipment related to closing or consolidating office spaces, as well as a restructuring charge of $8.7 million related to our workforce reduction. We expect this course of action to result in an aggregate annual expense savings of approximately $36 million beginning in fiscal 2021.

In addition, during fiscal 2020, we changed our practice of selling term software licenses with separate license and maintenance components to a single software subscription contract with license and maintenance bundled. This transition will be substantially completed by the end of the first quarter of our fiscal 2021. This will shift the timing of our revenue recognition on these subscription sales, resulting in less revenue recognized upfront and more revenue recognized over the term of these subscriptions. We expect a decline in revenue recognized from term software licenses in fiscal 2021 as we transition to the new term license subscription model. This change will not negatively impact our cash flows.

Overview of Financial Results

Total revenues for fiscal 2020 were $1.29 billion, an increase of 12% from $1.16 billion in fiscal 2019. We continue to drive growth in our Scores segment. Scores revenue increased 25% to $528.5 million in fiscal 2020 from $421.2 million in fiscal 2019, and Scores operating income increased 26% to $454.3 million in fiscal 2020 from $361.4 million in fiscal 2019. For our Applications and Decision Management Software segments, our SaaS business continues to grow as we pursue our cloud-enabled, platform-based strategy. Revenue derived from our cloud-enabled SaaS business, which includes both subscription revenue and associated professional services revenue, increased 11% to $300.0 million during fiscal 2020, from $270.4 million during fiscal 2019. SaaS subscription revenue increased 11% to $236.0 million during fiscal 2020, from $213.1 million during fiscal 2019.

We derive a significant portion of revenues internationally, and 32% and 34% of total consolidated revenues were derived from clients outside the U.S. during fiscal 2020 and 2019, respectively. A significant portion of our revenues are derived from the sale of products and services within the banking (including consumer credit) industry, and 86% and 87% of our revenues were derived from within this industry during fiscal 2020 and 2019, respectively. In addition, a significant share of our revenues come from transactional or unit-based software license fees, transactional fees 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 75% and 74% of our revenues during fiscal 2020 and 2019, respectively.

Operating income for fiscal 2020 was $296.0 million, an increase of 17% from $253.5 million in fiscal 2019. Operating margin was 23% and 22% for fiscal 2020 and 2019, respectively. Net income increased 23% to $236.4 million in fiscal 2020 from $192.1 million in fiscal 2019 primarily due to an increase in operating income. Diluted earnings per share for fiscal 2020 was $7.90, an increase of 25% from $6.34 in fiscal 2019.

COVID-19 Update

In March 2020, the World Health Organization declared the outbreak of COVID-19 a global pandemic, which has spread throughout the U.S. and the world. The COVID-19 pandemic has resulted in authorities implementing numerous measures to contain the virus, including quarantines, shelter-in-place orders, travel bans and restrictions, and business limitations and shutdowns.

Our focus remains on promoting employee health and safety, serving our customers and ensuring business continuity. Si

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Market Risk Disclosures

We are exposed to market risk related to changes in interest rates and foreign exchange rates. We do not use derivative financial instruments for speculative or trading purposes.

Interest Rate

We maintain an investment portfolio consisting of bank deposits and money market funds. The funds provide daily liquidity and may be subject to interest rate risk and fall in value if market interest rates increase. We do not expect our operating results or cash flows to be affected to any significant degree by a sudden change in market interest rates. The following table presents the principal amounts and related weighted-average yields for our investments with interest rate risk at September 30, 2020 and 2019:

On July 14, 2010, we issued $245 million of senior notes in a private placement to a group of institutional investors, the outstanding aggregate principal amount of which was paid in full at maturity on July 14, 2020 (the “2010 Senior Notes”). On May 8, 2018, we issued $400 million of senior notes in a private offering to qualified institutional investors (the “2018 Senior Notes”). On December 6, 2019, we issued $350 million of senior notes in a private offering to qualified institutional investors (the “2019 Senior Notes,” along with the 2010 Senior Notes and 2018 Senior Notes, the “Senior Notes”). The fair value of the Senior Notes may increase or decrease due to various factors, including fluctuations in market interest rates and fluctuations in general economic conditions. See Management’s Discussion and Analysis of Financial Condition and Results of Operations — Capital Resources and Liquidity for additional information on the Senior Notes. The following table presents the carrying amounts and fair values for the Senior Notes at September 30, 2020 and 2019:

(*) The carrying value of the Senior Notes was reduced by the net debt issuance costs of $10.6 million and $5.2 million at September 30, 2020 and 2019, respectively.

We have interest rate risk with respect to our $400 million unsecured revolving line of credit. 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. A change in interest rates on this variable rate debt impacts the interest incurred and cash flows, but does not impact the fair value of the instrument. We had $95.0 million in borrowings outstanding at a weighted-average interest of 1.285% under the credit facility as of September 30, 2020.

Foreign Currency Forward Contracts

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, Euro and Singapore dollar.

Foreign-currency-denominated receivable and cash balances are remeasured at foreign exchange rates in effect on the balance sheet date with the effects of changes in foreign exchange rates reported in other income, net. The forward contracts are not designated as hedges and are marked to market through other income, 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, 2020 and 2019:

The foreign currency forward contracts were entered into on September 30 of each fiscal year; therefore, the fair value was $0 on September 30, 2020 and 2019.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the stockholders and the Board of Directors of

Fair Isaac Corporation

San Jose, California

Opinions on the Financial Statements and Internal Control over Financial Reporting

We have audited the accompanying consolidated balance sheets of Fair Isaac Corporation and subsidiaries (the "Company") as of September 30, 2020 and 2019, 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, 2020, and the related notes (collectively referred to as the "financial statements"). We also have audited the Company’s internal control over financial reporting as of September 30, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of September 30, 2020 and 2019, and the results of operations and cash flows for each of the three years in the period ended September 30, 2020, 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, 2020, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO.

Change in Accounting Principle

As discussed in Note 1 to the financial statements, the Company has changed its method of accounting for leases in fiscal year 2020 due to adoption of the new lease standard (Topic 842). The Company adopted the new lease standard using the modified retrospective approach.

Basis for Opinions

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 are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.

Our audits of the financial statements included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. 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.

Definition and Limitations of Internal Control over Financial Reporting

A company’s internal control over financial reporting is a process designed 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 its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current-period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Revenues -Refer to Note 1 to the financial statement

Critical Audit Matter Description

The company recognizes revenue when control of the promised goods or services in a contract is transferred to the customer, in an amount that reflects the consideration to which the company expects to be entitled to in exchange for those goods or services. The Company's revenue is primarily derived from term-based or perpetual licensing of software and scoring products and solutions, and associated maintenance; software-as-a service (SaaS) subscription services; scoring and credit monitoring services for customers; and professional services.

The Company's contracts with customers often includes promises to transfer multiple products and services to a customer. For contracts with customers that contain various combinations of products and services, the Company evaluates weather the product or service are distinct. Distinct product 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 transactional revenue, the transaction price for contracts with customers 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.

For contracts with multiple performance obligations, the transaction price is allocated to each performance obligation

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Not applicable.

Evaluation of Disclosure Controls and Procedures

An evaluation was carried out under the supervision and with the participation of FICO’s management, including the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of the design and operation of FICO’s disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this annual report. Based on that evaluation, the CEO and CFO have concluded that FICO’s disclosure controls and procedures are effective to ensure that information required to be disclosed by FICO in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms. In addition, the disclosure controls and procedures are designed to ensure that information required to be disclosed is accumulated and communicated to management, including the CEO and CFO, allowing timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

No change in FICO’s internal control over financial reporting was identified in connection with the evaluation required by Rule 13a-15(d) of the Exchange Act that occurred during the year ended September 30, 2020, that has materially affected, or is reasonably likely to materially affect, FICO’s internal control over financial reporting.

Management’s Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Under the supervision and with the participation of management, including our CEO and CFO, we conducted an evaluation of the effectiveness of our internal control over financial reporting as of September 30, 2020 based on the guidelines established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation management has concluded that our internal control over financial reporting was effective as of September 30, 2020.

Deloitte & Touche LLP, an independent registered public accounting firm that audited the consolidated financial statements included in this Annual Report on Form 10-K, has also audited the effectiveness of our internal control over financial reporting as of September 30, 2020, as stated in their attestation report included in Part II, Item 8 of this Annual Report on Form 10-K.

Not applicable.

PART III

The required information regarding our Directors is incorporated by reference from the information under the caption “Our Director Nominees” in our 2021 Proxy Statement to be filed with the SEC within 120 days after September 30, 2020.

Our current executive officers are as follows:

The required information regarding compliance with Section 16(a) of the Securities Exchange Act is incorporated by reference from the information in our 2021 Proxy Statement to be filed with the SEC within 120 days after September 30, 2020.

FICO has adopted a Code of Ethics for Senior Financial Management that applies to the Company’s Chief Executive Officer, Chief Financial Officer, Controller and other employees performing similar functions who have been identified by the Chief Executive Officer. We have posted the Code of Ethics on our website located at www.fico.com. FICO intends to satisfy the disclosure requirement under Item 5.05 of Form 8-K regarding an amendment to, or a waiver from, this Code of Ethics by posting such information on its website. FICO also has a Code of Conduct and Business Ethics applicable to all directors, officers and employees, which is also available at the website cited above.

The required information regarding the Company’s audit committee is incorporated by reference from the information under the caption “Board Committees” in our 2021 Proxy Statement to be filed with the SEC within 120 days after September 30, 2020.

The information required by this Item is incorporated by reference from the information under the captions “Director Compensation for Fiscal 2020” and “Executive Compensation” in our 2021 Proxy Statement to be filed with the SEC within 120 days after September 30, 2020.

The information required by this Item is incorporated by reference from the information under the caption “Security Ownership of Certain Beneficial Owners and Management” and “Executive Compensation Plan Information” in our 2021 Proxy Statement to be filed with the SEC within 120 days after September 30, 2020.

The information required by this Item is incorporated by reference from the information under the caption “Certain Relationships and Related Persons Transactions” in our 2021 Proxy Statement to be filed with the SEC within 120 days after September 30, 2020.

The information required by this Item is incorporated by reference from the information under the caption “Ratification of Independent Registered Public Accounting Firm” in our 2021 Proxy Statement to be filed with the SEC within 120 days after September 30, 2020.

PART IV

1. Consolidated Financial Statements:

2. Financial Statement Schedules

All financial statement schedules are omitted as the required information is not applicable or as the information required is included in the consolidated financial statements and related notes.

3. Exhibits:

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

DATE: November 10, 2020

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.